[Senate Hearing 111-462]
[From the U.S. Government Publishing Office]
S. Hrg. 111-462
GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM
=======================================================================
HEARING
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
----------
HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2010
----------
Printed for the use of the Congressional Oversight Panel
Available on the Internet:
http://www.gpoaccess.gov/congress/house/administration/index.html
S. Hrg. 111-462
GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM
=======================================================================
HEARING
CONGRESSIONAL OVERSIGHT PANEL
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 25, 2010
__________
Printed for the use of the Congressional Oversight Panel
Available on the Internet:
http://www.gpoaccess.gov/congress/house/administration/index.html
U.S. GOVERNMENT PRINTING OFFICE
56-723 WASHINGTON : 2010
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20402-0001
CONGRESSIONAL OVERSIGHT PANEL
Panel Members
Elizabeth Warren, Chair
Paul Atkins
J. Mark McWatters
Richard H. Neiman
Damon Silvers
C O N T E N T S
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Page
Opening Statement of Elizabeth Warren, Chair, Congressional
Oversight Panel................................................ 1
Statement of Paul Atkins, Member, Congressional Oversight Panel.. 5
Statement of Richard Neiman, Member, Congressional Oversight
Panel.......................................................... 6
Statement of J. Mark McWatters, Member, Congressional Oversight
Panel.......................................................... 9
Statement of Ron Bloom, Senior Advisor to the Secretary of the
Treasury, Presidential Task Force on the Auto Industry......... 10
Statement of Jim Millstein, Chief Restructuring Officer, U.S.
Department of the Treasury..................................... 12
Statement of Michael Carpenter, Chief Executive Officer, GMAC
Financial Services............................................. 37
Statement of Robert Hull, Chief Financial Officer, GMAC Financial
Services....................................................... 43
Statement of Christopher Whalen, Senior Vice President and
Director, Institutional Risk Analytics......................... 64
Statement of Michael Ward, Analyst, Soleil-Ward Transportation
Research....................................................... 87
GMAC FINANCIAL SERVICES AND THE TROUBLED ASSET RELIEF PROGRAM
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THURSDAY, FEBRUARY 25, 2010
U.S. Congress,
Congressional Oversight Panel,
Washington, DC.
The Panel met, pursuant to notice, at 10:01 a.m. in Room
SD-342, Dirksen Senate Office Building, Elizabeth Warren, Chair
of the Congressional Oversight Panel, presiding.
Present: Elizabeth Warren [presiding], Richard Neiman, Paul
S. Atkins, and J. Mark McWatters.
OPENING STATEMENT OF ELIZABETH WARREN, CHAIR, CONGRESSIONAL
OVERSIGHT PANEL
Chair Warren. The February 25, 2010 hearing of the
Congressional Oversight Panel is now called to order. Good
morning, my name is Elizabeth Warren, I am the chair of the
Congressional Oversight Panel.
Because today's hearing will focus on Treasury's efforts to
stabilize GMAC through the Troubled Asset Relief Program, it
makes sense to begin with an accounting of the assistance, to
date.
As of today, taxpayers have spent $17.2 billion to bail out
GMAC. We now own 56.3 percent of this company. Other banks have
received tens of billions of dollars under TARP, but aspects of
GMAC's funding are without precedent. Of all of the banks
bailed out under TARP, only GMAC received money through the
Automotive Industry Finance Program, an initiative originally
established to support General Motors and Chrysler. Of all of
the banks bailed out under TARP, only GMAC needed additional
TARP funds to meet the capital buffers required under the
stress test.
GMAC's unusual treatment by Treasury may be due, in part,
to the company's unusual history. It was founded in 1919 as a
wholly-owned subsidiary of General Motors, intended to provide
financing for clients to buy cars and dealers to buy inventory.
Since then, GMAC has expanded far beyond the realm of
automotive lending to provide home mortgages, auto insurance
for both dealers and consumers, and even credit to various
manufacturers and distributors in the non-auto industries. In
2006, it ceased to be a subsidiary of GM, and it now ranks as
the 14th largest bank in the United States.
Even in light of GMAC's unique background, Treasury's
exceptional actions require special scrutiny. Today's hearing
will help inform the Panel's March Oversight Report, which will
examine the ways that TARP was used to support GMAC, the
rationale behind the support and the approach being taken by
GMAC's new management to return the company to profitability,
and to repay the taxpayers.
The Panel would also like to explore the issue as to
whether GMAC is lending again, and whether it is lending on
favorable terms.
Let us not forget, as we do this hearing, that Treasury
bailed out GMAC on no fewer than three occasions: in December
2008, in May 2009 and again in December 2009. On each occasion,
Treasury had a choice to make on behalf of taxpayers: Was
another bailout worth it? Was GMAC such a unique, irreplaceable
player in our financial system that it must not be allowed to
collapse? Or should it be required to bear the full cost of its
mistakes and suffer failure?
Three times, GMAC asked Treasury to cast it a lifeline, and
three times, Treasury said yes. The critical question we must
ask going forward is whether this was the best and most
appropriate possible use of taxpayer dollars under TARP, and
whether we can expect a request for a fourth bailout in the
future.
To help the Panel examine these issues, we will hear from
three panels of witnesses. On our first panel, we are joined by
two members of the Administration. On our second panel, we will
hear from two executives from GMAC. And, finally, on our third
panel, we will hear from industry analysts.
To all of our witnesses, please note that we sincerely
thank you for being here. These are complex issues of national
importance, and we appreciate your willingness to help us learn
from your perspectives.
Before we proceed with the first panel, allow me first to
offer my colleagues an opportunity to provide their opening
remarks.
[The prepared statement of Chair Warren follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
STATEMENT OF PAUL ATKINS, MEMBER, CONGRESSIONAL OVERSIGHT PANEL
Mr. Atkins. Well, thank you very much, Madam Chair. Today's
hearing on General Motors Acceptance Corporation is a
significant one for this panel. It marks the first time that we
will explore the circumstances of a particular recipient of
TARP funding, and what a recipient GMAC is.
GMAC is sort of a hybrid: Two automobile companies were
given a special deal under TARP and all of the other recipients
of TARP funds, besides GMAC, were truly banks and had operated
as banking institutions for years. They had grown, supposedly,
too big to fail.
It's widely acknowledged that GMAC was not one of these
institutions. It was not of great systemic significance in and
of itself. In what, basically, was a series of ad hoc political
decisions, the U.S. government has advanced approximately $17
billion in taxpayer funds, so far, to GMAC on top of, of
course, the other billions that were given to GM and Chrysler
in the auto bailouts.
Unlike the automobile companies, GMAC never went through
bankruptcy; it never went through a reorganization. Every step
of the way it's being treated a bit differently and is, I
think, in a way, a model for moral hazard. Its shareholders
were not wiped out--unlike the millions of shareholders of
General Motors--all of this has been done in the name of trying
to keep low cost lending available to support GM's automobile
sales, but ironically most of the money that's being poured
into GMAC has gone into its mortgage loan portfolio.
The government now owns a majority interest in GMAC and
appoints board members. The original shareholders still have
their ownership interests, albeit diluted. The government
appoints board members, but how are they chosen? Who do these
board members represent? Under State law, they have fiduciary
duties to all shareholders; does Treasury try to influence
them? How will they judge management? Directors have a critical
advisory role, as well as an oversight role, and so what
attributes is Treasury looking for?
GMAC was artificially declared to be a bank holding company
only after it reorganized itself so that the Fed could even
consider its application. It changed its industrial loan
corporation to a State bank so it could be eligible for TARP
and other programs.
GMAC, at the time, didn't meet the Fed's criteria for bank
holding companies. The Fed, of course, required it to raise
capital. But GMAC could not raise capital in the private
sector. Government money has flown into GMAC three times now,
and each time we hear that it's the last. First, Treasury put
in about $5.25 billion at the end of 2008, then five months
later, of course, in May 2009, another $7.88 billion, and then
just last month, another $3.98 billion. And most of this money
has not necessarily gone into automobile loans but, of course,
into ResCAP.
So, I guess today what I will be interested in hearing is
what GMAC management is doing to work on a plan to get the
company out from under Uncle Sam's wing and to be back
independent, again. Is it viable? Has Treasury ever made an
assessment to that effect? If it made such an assessment before
putting in money, it's obviously not being much publicly
discussed. We need to talk about Ally Bank, as well, and other
aspects. So, I'll be interested in exploring these with you
today.
Thanks.
Chair Warren. Thank you, Mr. Atkins.
Superintendent Neiman.
STATEMENT OF RICHARD NEIMAN, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. Neiman. Thank you and good morning.
I am very pleased that the Panel is devoting its March
report and this hearing to the subject of GMAC. Support for
GMAC is an especially significant TARP initiative, because GMAC
is both a large bank holding company and a critical part of the
American automobile industry. Therefore, the support uniquely
embodies both large governmental interventions in the financial
system, and in the auto industry.
As we know, GMAC was the only one of the 19 stress tested
bank holding companies that did not raise sufficient private
capital. It therefore required additional governmental support
in order to meet its SCAP mandated capital buffer requirement.
As a result of a series of TARP infusions, the U.S.
Treasury and the U.S. taxpayer now own 56 percent of GMAC's
equity, and over $17 billion invested.
Importantly, GMAC was rescued not because it is too big to
fail, but because it is too interconnected to fail. Or, to be
more precise, too co-dependent with General Motors, with
Chrysler and the American automobile industry. It was deemed
that a failure of GMAC would have significantly undermined or
fatally derailed the stabilization of the American auto
manufacturers with significant impact on our economy.
GMAC is the nearly exclusive provider of inventory lending
to GM and Chrysler dealers, essentially enabling their
distribution system of cars and trucks to function. The
importance of GMAC's role was actually increased last year when
Chrysler Financial was absorbed by GMAC. In fact, GMAC is
arguably even more interconnected today than it was before the
financial crisis, given the Treasury's current investment and
controlling positions in GMAC and the auto companies.
During the hearing, I will be most interested to learn from
our distinguished witnesses how you are addressing the ongoing
risk of interconnectedness. I'd like to hear about your near-
term business plans for GMAC's existing lines of business, as
well as your strategic vision over the long term.
I hope to learn about your specific plans to ensure GMAC's
viability, and to reduce the auto companies--and GMAC's--
codependence, going forward.
I recognize it is possible that the goal of reducing GMAC's
codependence with the auto industry may, at times, run counter
to the goal of increasing GMAC's profitability.
I very much look forward to hearing how you will balance
these considerations and manage the difficult strategic issues
that confront you, and I look forward to hearing your
testimony.
[The prepared statement of Mr. Neiman follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Superintendent Neiman.
Mr. McWatters.
STATEMENT OF J. MARK McWATTERS, MEMBER, CONGRESSIONAL OVERSIGHT
PANEL
Mr. McWatters. Thank you, Professor Warren. I very much
appreciate the attendance of the witnesses and I look forward
to hearing your views.
On three separate occasions over the past 15 months, the
American taxpayers have involuntarily invested approximately
$17 billion in GMAC. Since the CBO, the Congressional Budget
Office, has assigned a 59 percent subsidy rate to the various
auto-related bailouts--including GMAC--as of December 2009, it
is not unreasonable to assume that the taxpayers will lose
approximately $10 billion of the $17 billion of TARP funds
allocated to GMAC.
Given the magnitude of these projected losses, three
fundamental issues remain for our consideration. First, prior
to committing taxpayer resources to GMAC, Treasury was
obligated to demonstrate that GMAC--and GMAC alone--was capable
of providing the auto finance services to both the retail
customers and dealers of Chrysler and GM and that no other
group of new or existing financial institutions could
reasonably fill the void upon the liquidation of GMAC.
It is not unreasonable to anticipate that many financial
institutions and private equity firms would welcome the
opportunity to extend credit to the retail customers and
dealers of Chrysler and GM and to securitize the instruments
received in such transactions. Even if GMAC--and GMAC alone--
possessed the expertise necessary to conduct an auto finance
business, a question nevertheless arises as to why the United
States government sanctioned and subsidized such monopolistic
power, instead of encouraging healthy competition from other
private sector financial institutions seeking to enter the
market.
Second, if Treasury carries the burden of the first issue,
Treasury must next demonstrate that it had no choice but to
bail out GMAC's ill-conceived bets in the subprime market in
the hopes of saving GMAC's auto finance business. In satisfying
this burden, Treasury must show that no viable approach existed
under the U.S. Bankruptcy Code, or otherwise, to extricate
GMAC's auto finance business from the taint of its insolvent
mortgage finance business, other than through the expenditure
of $17 billion of taxpayer-funded resources.
GMAC could have, for example, and without limitation, sold
its auto finance business for fair market value to a third
party outside of bankruptcy, or sold its auto finance business
to a third party under Sec. 363 in a bankruptcy proceeding. If
GMAC's auto finance business is truly viable and profitable, it
is not unreasonable to consider that other financial
institutions and private equity firms would welcome the
opportunity to acquire GMAC's auto finance business with its
captive group of customers.
Third, even if GMAC carries the burden on both issues,
Treasury must also demonstrate why GMAC was too big or too
interconnected with the financial system and the overall
economy to fail, and why GMAC merited such unprecedented
largesse when so many other American businesses and families
are suffering from the worst economic downturn in several
generations.
It is also troublesome that Treasury would commit the
taxpayers to fund three rounds of bailouts for an institution
that placed risky bets on the subprime market. Although GMAC
faced bankruptcy and potential liquidation as a result of its
ill-advised investments, the taxpayer-funded bailouts of the
company injected unwarranted moral hazard risk into the market
and all but established the United States government as the
implicit guarantor of any future losses arising from such
activities. Such action will also encourage other private
sector participants to engage in less-than-prudent behavior,
confident in the expectation that the taxpayers will again
offer a bailout upon the reversal of their economic fortune.
A market economy, by necessity, must cull the products and
services of the weakest participants so that those who have
developed innovative and competitive ideas may prosper on a
level playing field. The opportunity for entrepreneurs to
succeed or fail, based upon their own acumen and judgment, must
survive the current recession and the implementation of the
TARP program.
Thank you for joining us today, and I look forward to our
discussion.
Chair Warren. Thank you very much, Mr. McWatters.
I want to note the absence of panel member Damon Silvers.
Mr. Silvers has recused himself on all matters relating to the
auto industry before the Panel. All of us who serve on this
panel do so on a part-time basis and Mr. Silvers, in his day
job, is the Director of Policy and Special Counsel to the AFL-
CIO.
The AFL-CIO has expressed views on the use of TARP funding
in the auto industry and for that reason, Mr. Silvers did not
feel it was appropriate for him to be involved in our oversight
of Treasury's assistance to GMAC.
We miss his good counsel, but we understand that he's
working to protect the integrity of the process.
So, with that, I'd like to introduce our first panel. We
have Ron Bloom who is the Senior Advisor to the Secretary of
the Treasury on the Presidential Task Force on the Auto
Industry, and we have Jim Millstein, Chief Restructuring
Officer for the U.S. Department of Treasury. Thank you both for
being here. I'll ask you for opening statements, I'll ask you
to hold them to five minutes, but any written remarks will be
included in the record.
Mr. Bloom.
STATEMENT OF RON BLOOM, SENIOR ADVISOR TO THE SECRETARY OF THE
TREASURY, PRESIDENTIAL TASK FORCE ON THE AUTO INDUSTRY
Mr. Bloom. Thank you. Good morning, Chair Warren, and
members of the Congressional Oversight Panel, thank you for the
opportunity to testify before you today. We are here to report
on the auto financing market and the relationship between GMAC
and the Treasury's investments in General Motors and Chrysler.
Over the past year, the Obama Administration has been
working to manage an historic crisis in the American automobile
industry. Working with their stakeholders and the President's
Auto Task Force, both GM and Chrysler underwent fair and open
bankruptcies and have emerged as stronger global companies. The
steps that the President took kept many hundreds of thousands
of Americans working and gave GM and Chrysler a chance to be
competitive businesses.
A viable auto industry requires financing for both dealers
and consumers. The vast majority of automobile purchases in the
U.S. are financed, including an estimated 80 to 90 percent of
consumer purchases and substantially all dealer inventory
purchases. For the last 80 years, the auto industry has largely
relied upon dedicated financing providers which have unique
resources and long-term experience underwriting automotive
credit.
GMAC has been the primary source of financing for GM's
dealers and consumers for over 90 years. At the time of
Treasury's initial investment in GMAC, in December 2008, GMAC
provided wholesale financing for 85 percent of GM's dealer
inventories and consumer financing for 25 percent of GM's
retail sales.
As a result of the financial crisis, credit availability to
auto dealers and consumers became severely impaired.
Uncertainty about the future of GMAC and Chrysler impaired the
ability of their captive finance companies--GMAC and Chrysler
Financial--to access the capital markets. Some estimates
suggest that the contraction in the auto finance market reduced
auto sales by 1.5 to 2.5 million cars per year.
By late 2008, one of GMAC's primary sources of funding, the
securitization market, was in severe distress, forcing GMAC to
dramatically restrict its lending activities to auto consumers
in order to preserve necessary capital for dealers. GMAC was
not able to access alternative sources of funding. Without
government assistance, GMAC would have been forced to suspend
financing lines to creditworthy dealerships, leaving them
unable to purchase inventory for their lots.
Without orders for cars, GM would have been forced to slow
or shut down its factories indefinitely to match the drop in
demand. Given its significant overhead, a slow-down or stoppage
in production would have toppled GM.
When the prior Administration decided to provide assistance
to GMAC in December 2008, GMAC at the time was providing $23.3
billion of financing for GM dealers. Had Treasury allowed GMAC
to fail, no single competitor or group of competitors could
have stepped in to absorb GMAC's entire loan portfolio. At that
time, 75 percent of GM dealers received their financing from
GMAC, while the next five lenders made up only 8 percent of
such lending. The remaining dealers were serviced by 200 banks,
most of which provided financing for only a single dealer.
Many large national banks faced significant threats to
their own financial health and lacked the capacity to
aggressively grow their auto lending portfolios. Moreover, GM
estimates that it would have taken a new provider up to six
months to create the infrastructure, systems, and human capital
necessary to replace GMAC.
Like GMAC, Chrysler Financial also faced a severe liquidity
crisis last year. In the spring of 2009, it became clear that a
Chrysler bankruptcy could well be required to effectuate a
restructuring of the company. Chrysler Financial had
approximately $20 billion of conduit financing that was slated
to expire by July 2009, some of it immediately upon the
occurrence of a Chrysler bankruptcy. Without these conduits,
Chrysler Financial would have been forced to discontinue
financing any new inventory for Chrysler dealers, the dealers
would have been unlikely to find alternative financing, and the
purchase of new vehicles from Chrysler by dealers through
Chrysler Financial would have ceased entirely.
Since Chrysler Financial financed approximately 60 percent
of dealer purchases from Chrysler, this would have resulted in
a near-total collapse of Chrysler revenues. Given the state of
the credit markets and the threat of a Chrysler bankruptcy,
Chrysler looked for, but found no, refinancing alternative.
Without a viable financing source for its customers and
dealers, a successful restructuring of Chrysler would,
likewise, not have been possible.
Now, let me turn to my colleague, Jim Millstein, to speak
to the particular strategies we employed to deal with this
situation.
Chair Warren. Mr. Millstein.
STATEMENT OF JIM MILLSTEIN, CHIEF RESTRUCTURING OFFICER, U.S.
DEPARTMENT OF THE TREASURY
Mr. Millstein. Thank you Chair Warren, members Neiman,
Atkins and McWatters.
I appreciate the opportunity to be here this morning, my
name is Jim Millstein, I am the Chief Restructuring Officer of
the Treasury Department. I joined Treasury in late May of 2009
after 28 years of working in the private sector on financial
restructurings.
I am going to focus on the actual investments that we made,
and the staging of those investments over the three different
tranches that we did.
As Mr. Bloom indicated, GMAC applied for, and received,
approval to become a bank holding company in December of 2008.
Shortly thereafter, the prior Administration invested $5.0
billion in GMAC, and GMAC was able to raise an additional $2.0
billion from its existing shareholders.
After the Obama Administration took office, Secretary
Geithner announced the Financial Stability Plan, a key
component of which was the ``stress test.'' The Treasury worked
with federal banking supervisors to develop the Supervisory
Capital Assessment Program (SCAP) to determine whether the
nation's largest bank holding companies had a capital buffer
sufficient to withstand losses and sustain lending in a
significantly more adverse economic environment. Domestic bank
holding companies with year-end 2008 assets exceeding $100
billion were required to participate in the SCAP. GMAC, with
$173 billion in assets as of year-end 2008, was one of these 19
institutions.
On May 7, 2009, the Federal Reserve released the initial
results of the stress test, which required--in GMAC's case--
that it raise $13.1 billion of new capital. In consultation
with the banking supervisors, Treasury agreed to help meet GMAC
meet that requirement by investing additional capital in two
traunches. The first investment of $7.5 billion was made on May
21st to address its immediate capital needs. Treasury
ultimately invested an additional $3.8 billion on December
30th, about $1.8 billion less than was originally anticipated,
largely due to less disruption to GMAC's business from the GM
and Chrysler bankruptcies.
Concurrent with the May transaction, GMAC also received
regulatory approvals that enabled it to enhance its liquidity.
The FDIC approved GMAC's application to issue debt under the
Temporary Liquidity Guarantee Program, and the company
ultimately issued $7.4 billion of unsecured debt, guaranteed by
the FDIC, under that program. The FDIC also increased the
amount of brokered deposits that GMAC's bank subsidiary could
raise. Today, those are at about $31 billion.
In addition, the Federal Reserve Board granted a waiver
under Sec. 23-A of the Federal Reserve Act expanding its bank
subsidiaries' ability to fund consumer and dealer finance loans
for GM and Chrysler with deposits traded to Chrysler Financial,
given the lack of funding options for Chrysler Financial and
the ramifications its failure would have had on Chrysler, as
Mr. Bloom has testified, several options were reviewed. It was
determined that the most effective method to provide financing
to Chrysler dealers and customers was to capitalize GMAC's
existing auto origination platform to a level adequate for it
to assume these financing responsibilities.
Therefore, in May, as part of the stress test results, the
Federal Reserve determined that GMAC required $4 billion in
additional capital to fund Chrysler's dealer and customer
originations, and that $4 billion was part of the $7.5 billion
that was put in, in May.
So, in conclusion, the Administration's investment in GMAC
has been, and continues to be, a critical component of the
effort to stabilize the auto industry. Providing GM and
Chrysler with a viable source of financing enabled Treasury to
facilitate the successful restructuring of each of these auto
companies. GMAC was uniquely positioned to provide the
personnel and infrastructure to originate and service auto
loans and is now the largest provider of retail and wholesale
financing to both GM and Chrysler customers and dealers.
It has now capitalized at levels well above historical
industry averages and it has, in fact, procured $2.0 billion of
new, unsecured financing based on the capitalization efforts
that Treasury has made.
As the owner of 56.3 percent of GMAC's common equity, we
have already designated two members of GMAC's Board, we have
two more that we are in the process of identifying, and soon to
designate. And as we have said on a number of occasions in
other contexts, as well, the United States government is a
reluctant shareholder in these circumstances, and we intend to
dispose of our investments as soon as practical, consistent
with protecting the taxpayers' interests.
I thank you.
[The joint prepared statement of Mr. Bloom and Mr.
Millstein follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you very much, Mr. Millstein.
So, I'll start with our questions here. Many analysts and
academics have pointed out that, in their view, bankruptcy
would have been a preferable way to deal with GMAC. That,
ultimately, it would have put it in a better long-term
financial position, permitted it to recover on stronger
footing, and cost less money for the taxpayer.
So, the first question I have is whether Treasury ever
considered bankruptcy as an option, either for GMAC or for a
sub-set of GMAC, more specifically, for ResCAP.
Mr. Bloom.
Mr. Bloom. Let me address your GMAC question.
Chair Warren. You're going to have to turn your microphone
on. That's all right.
Mr. Bloom. You know, I'm sick, but I'm here today anyway.
At the time we were looking at the situation evolving for
GM and Chrysler, obviously the situation with GMAC was integral
to that. And we did look at a number of different options for
GMAC.
Our conclusion at the time was that bankruptcy for Chrysler
and GM would be very hard to avoid. We obviously didn't make
the final decision until the last minute, but as we were
strategizing our way through this in April and in May, our
conclusion was that a bankruptcy for Chrysler and for General
Motors would be very, very hard to avoid. And that, in order to
successfully reorganize these companies, we would have to
support them going into bankruptcy.
Those were exceedingly complex and challenging
transactions. Both of them had enormous execution risks inside
of them. The decision we had to make----
Chair Warren. I'm sorry, execution risks? There were people
who were executed? What are you talking about?
Mr. Bloom. Execution risks, meaning the ability to conduct
the bankruptcy successfully and have the companies come out the
other side.
Chair Warren. All right.
Mr. Bloom. As reorganized entities.
Chair Warren. So, you were concerned that if you put them
into bankruptcy, they might actually fail?
Mr. Bloom. Right.
Chair Warren. No matter how many taxpayer dollars we pumped
in.
Mr. Bloom. Right, right. That's what we were thinking about
with General Motors and Chrysler.
Chair Warren. Okay.
Mr. Bloom. But we made a decision----
Chair Warren. And I presume that's because there was
concern that people wouldn't buy their cars?
Mr. Bloom. There were many concerns. People might not buy
their cars, you're in a legal process, as you well know, the
bankruptcy judge is the entity responsible--no complex
bankruptcy is without risk.
Chair Warren. Okay.
Mr. Bloom. So, but we concluded--weighing the risks and the
benefits, the rewards, the alternatives--that that was the
proper route to take with General Motors and Chrysler.
To add a GMAC bankruptcy into that equation, in our
judgment, would have exponentially increased the risk of
concluding all three transactions in a successful way.
Chair Warren. And why is that?
Mr. Bloom. Because you now added an independent set of--if
you'll use my phrase again--execution risks for concluding a
GMAC bankruptcy, number one. And number two, the effect of a
GMAC bankruptcy failing would have been that both the Chrysler
and the GM bankruptcies would have failed.
Chair Warren. So, but wait a minute. You decided to go
forward with the auto industry bankruptcy ultimately because
you believed it was the chance--the only chance, I take it--to
get that industry back on firm footing. And you wiped out all
of its equity, you caused its debt to have to take a haircut,
and that's what helped put it back on firm footing. That, and
billions of dollars of taxpayer money.
Mr. Bloom. Correct.
Chair Warren. When it came to GMAC, you didn't wipe out the
equity.
Mr. Bloom. Right.
Chair Warren. You left the equity intact, all of the debt
continued to be repaid at 100 cents on the dollar; a far better
deal to have been an investor in GMAC than to have been an
investor in GM. I'm still not understanding why not? Why the
difference in the treatment?
Mr. Bloom. Because these two are connected. If we had
allowed GMAC to go in, as well, we felt--and I'll give you a
second answer in a minute, but let me deal with your first
point--if GMAC had gone in as well, we felt like we would have
been putting the success of the GM and Chrysler bankruptcies at
substantially higher risk.
Chair Warren. But what is the additional risk that's
added--you're telling us----
Mr. Bloom. Because----
Chair Warren [continuing]. That GMAC is deeply intertwined,
which is the sole reason to save it.
Mr. Bloom. No, what I'm saying is, that if the GMAC
bankruptcy had not been successful, which was an independent
event that had its own independent risk factors associated with
it--that would have caused the failure of the GM and Chrysler
bankruptcies, even if they would have otherwise have been
successful. So, the risk is sitting on top of--and therefore
influencing--our judgment, because you've got to make one
judgment about the totality of this situation. That's the first
point.
The second point is that the investment dollars that we had
to consider if GMAC had gone into bankruptcy, were very, very
substantial. There was obviously a lot of money invested in the
case we're examining, the stress test called for $13 billion,
it's wound up to only be $11.3 billion, but obviously that's a
lot of money. But the alternative was not free of very, very
substantial investment, as well.
Chair Warren. So, let me stop you there. I'm going to be
disciplined about time, because I've been bad about this
sometimes at hearings in the past. I'm going to stop there,
we'll just return to this when I----
Mr. Bloom. Okay.
Chair Warren [continuing]. When I have my next question.
Because I have some questions about why that would be more
expensive.
Mr. Bloom. Okay.
Chair Warren. Mr. Atkins.
Mr. Atkins. Well, actually, I would want to----
Chair Warren. Please.
Mr. Atkins [continuing]. Continue in that vein, and you
should finish your thought because I guess when we look back at
it, as Professor Warren was saying, the disparate treatment of
the various shareholders, it may be, perhaps, here the
shareholders put in more skin in the game, ultimately, and
maybe that's what you were getting to but I just--I wanted to
hear you out as far as your justification of this treatment?
Mr. Bloom. Well, just on the specific point you make, I
would point out that the GMAC shareholders have been very, very
substantially diluted by the transactions that----
Mr. Atkins. But not wiped out.
Mr. Bloom. They have not been completely wiped out, that is
correct, but I just want to note for the record that there's
been very, very substantial dilution for the shareholders, the
investments that were made were made in a series of instruments
that Mr. Millstein can talk more about, but they were preferred
shares and so they are senior to existing equity. There was not
any particular effort to protect shareholders, there was simply
a judgment made that to bring the company into bankruptcy, as
well, (a) would have exponentially decreased the success
probabilities of GM and Chrysler, and (b) that when we looked
at the overall possible exposure we would face, in addition to
the execution risk, even in a transaction that went exactly as
planned, the dollars that would have been required to execute a
GMAC bankruptcy would have been very, very substantial. In
excess of the dollars that were invested, in fact.
Mr. Millstein. May I just--I obviously wasn't part of the
Treasury team making decisions at the time, but I have been in
and around the bankruptcy courts a little bit over the course
of my career and one thing I would add in this regard is that
there are very few instances in which a finance company has
been successfully reorganized in Chapter 11. Finance companies,
obviously, are intermediaries between people who lend to them
and their own lending they make.
And as Chair Warren knows, the ability for a finance
company to continue to draw on its pre-petition lines of credit
is terminated upon the filing of a bankruptcy. So, GMAC would
have had no ability to fund ongoing originations, both for
dealers or customers, after a filing of Chapter 11. It would
have required a massive DIP.
And if you look today at, you know, the outstanding
customer receivables, that is, the loans that GMAC makes to
individual lessors and buyers of cars, as well as to the
dealers, you're looking at a $40 billion to $50 billion
outstanding balance of receivables.
So, in the spring of 2009 after one of the greatest
seizures in the credit markets in the history of the world,
when DIP financing was not available at all from the regular
lenders--had the government of the United States wanted to
facilitate the reorganizations of Chrysler and GM by ensuring
that there was continued availability of dealer floor plan
financing as well as financing available to customers to
purchase GM and Chrysler cars, it would likely have had to have
been the DIP lender to the reorganization.
Mr. Atkins. But, in effect, the United States is the DIP
lender. I mean, it has stepped in----
Mr. Bloom. Well, no----
Mr. Atkins [continuing]. To, I mean, the only reason why
GMAC can even attract any sort of money from the marketplace is
because the U.S. government is there. And, you know, I don't
know--if you look at it, at its inventory and what's able to be
financed, you know, is the quality there to stand independently
from the U.S. government, I guess is the----
Mr. Bloom. I think the point we're making, though, is that
the dollars required to finance GMAC in a bankruptcy would have
been, literally, on the order of $50 billion. Because all of
the financing, as it ran off and assuming you--and our judgment
was you needed to support dealer financing, because if you
don't do that, the dealers can't buy cars, and if the dealers
can't buy cars, the companies don't make cars, in addition to
the retail. So, the total dollars that would have been required
since there was no alternative financing market; these markets
were in very, very severe stress at that time--
So, to finance all of this, it would have been all
government money. And eventually what would have happened to it
is unknowable, but we're literally talking about $40 billion or
$50 billion.
Mr. Atkins. Okay, but Ford has been able to make it through
this whole time, right? And, they were able to make----
Mr. Bloom. Ford wasn't in bankruptcy.
Mr. Atkins. Right. But, if you compare the two companies, I
mean, I'm just--my time is out here, but what I want to explore
later is have we created this huge moral hazard by supporting
bad bets in the past, the U.S. government taking over those
bets in effect, and you look at somebody like Ford that has not
gone down that road, is independent, has not had to rely on the
U.S. government.
Thank you, sorry.
Chair Warren. Thank you, Mr. Atkins.
Superintendent Neiman.
Mr. Neiman. Thank you.
And having already thanked you for being at the hearing
today, I also do want to, though, thank you for your government
service. We all know that there are, you know, millions of
dedicated individuals who spend their full life working in
governmental service, but the fact that you have all decided to
leave, for this period of time, private practice to join the
government, this is as critical a time as any, and I appreciate
you for your government service.
Mr. Bloom. Thank you.
Mr. Neiman. You know, I want to come back to my opening
statement regarding interconnectedness between the two entities
as well as forward-thinking strategic issues going forward.
You know, given the government's control of both GM and
GMAC and that your destinies are so interrelated, are there
issues that arise where you might need to distinguish between
GMAC's long-term survivability and its deference to the needs
of GM?
So, obviously, there are certain actions or practices which
may benefit GM, but may be at odds or actually conflict with
the interests of GMAC. And just one obvious example would be
pricing and underwriting the terms of dealer loans.
I'd be interested in your thoughts, going forward, as well
as how you actually manage these types of conflicts?
Mr. Millstein. I think it's an excellent question. There's
no game plan, there's no roadmap for what the government of the
United States has done, here. And so we're all guided by first
principles. And among the first principles that we in the
Treasury Department certainly are deploying in this regard is
that we don't bring any special expertise to the management of
private commercial enterprises. We don't have any monopoly of
wisdom on the right strategy for GM as a car manufacturer, or
for GMAC as a finance company.
So, we have said and we are--I can tell you with someone
overseeing some of our biggest investments--we are avoiding any
effort to try to micromanage these companies. The approach
we've taken is that, unfortunately our capital was required in
one of the worst financial crises of our generation, to help
sustain financial stability, but that we have populated the
companies that we've invested in, largely changed the boards
over, in many cases, with people we think are qualified to make
these kinds of strategic decisions and to help guide the
managements in evaluating the strategic alternatives available
to them and we have tried to stay away from even pretending
that we bring some special knowledge of this.
Mr. Neiman. Well, let me give another example of where
these conflicts could arise. Certainly in approving a strategic
plan going forward, there are issues around shedding the
mortgage business. On one hand, you would think that increasing
interdependence and concentration of risk with respect to GM
after shedding this would present an increased risk to the
taxpayer.
On the other hand, it may also decrease risk if you're
avoiding a diversification of the business. So, how do you
manage these risks, and how have you assessed the risks around
shedding a volatile business like the mortgage business? Is it
in the interests of the taxpayer, or is it not in the interests
of the taxpayer?
Mr. Millstein. Again, the Board of Directors of GMAC has
done an evaluation of the strategic alternatives around ResCAP,
they've shared that analysis with us--ResCAP being the mortgage
subsidiary--and we think the conclusions they've reached,
particularly around the recapitalization that we participated
in December--we think the conclusions they reached are
reasonable. Again, we have not independently directed, guided
or tried to manage that process.
Mr. Neiman. So, the role with respect to the Treasury and
GMAC is no different than others. We have heard from staff
discussions that Treasury did play a stronger advisory role
with respect to GMAC than other entities, than to GM. Is that
an accurate characterization?
Mr. Millstein. I can't speak to GM or Chrysler, the car
companies--I mean, we have a lot invested in GMAC, we have a
lot invested in the car companies. We are taking our oversight
responsibilities seriously, we have frequent contact with the
management to evaluate the strategies they are employing and
the results of their operations, but again, I don't think we're
in a position to dictate policy for them.
Mr. Bloom. And it's hard to compare. Jim works more on
GMAC, I am more responsible for oversight of GM and Chrysler.
But I can tell you, again, we're quite engaged in terms of
knowing what's going on at GM and Chrysler, but we likewise,
with GM, we are not saying to them, ``You know, we think this
is the right strategy,'' and most assuredly not giving them
advice on how to manage their relationship with GMAC. We take
that--just like they manage their relationship as another
supplier--as something that the Board and the management are
responsible for.
Chair Warren. Thank you.
I want to go back to this number you mentioned, Mr. Bloom--
$40 to $50 billion dollar--oh, I'm sorry, Mark. I apologize. I
was----
Mr. McWatters. You know, when you're fourth in line----
Chair Warren. I apologize.
Mr. McWatters. All of the good questions are taken.
Chair Warren. Mr. McWatters, I do apologize.
Mr. McWatters. Mr. Bloom, on a fair market value basis, is
GMAC solvent today?
Mr. Bloom. I think----
Mr. McWatters. Solvent meaning assets greater than
liabilities, including contingent liabilities?
Mr. Bloom. The balance sheet would suggest it is. And
remember, this is now an entity that is subject to federal
supervision of two different banking regulators. The bank
itself, Ally Bank of the FDIC, and the bank holding company, by
the Federal Reserve Board.
It went through the stress test, which was a reasonably
rigorous testing of the assets on its balance sheet, under
adverse scenarios, and the stress test concluded it needed--
originally the conclusion was, it needed $13 billion of
incremental capital. That turned out to be--after we saw the
results of the GM and Chrysler bankruptcies, it proved to be
$1.8 billion less. But the point being that federal banking
supervisors are on top of this company, as any other banking
institution. And it has had the benefit of significant capital
injections from the United States Treasury. But I think the----
Mr. McWatters. Do you anticipate any more capital
injections?
Mr. Bloom. Well, no, I certainly hope not. I think this is
worth talking about because it answers another question that
was posed earlier. Which is, we sit today holding 56 percent of
the common stock, but we also hold significant convertible
preferred stock, which if there is further deterioration in the
quality--this is how banking regulators talk about capital--the
quality of its capital, common stock has a higher quality
capital, more loss absorbing than preferred stock. We,
actually, sit on a lot of preferred stock that is convertible
into common. It would be further dilutive of the other
shareholders' interests were we to do it, but it would help
sustain GMAC's capital position, if needed.
I think we sort of recognize that if it needs us to
convert, we may very well have to. But from the point of view
of our exit strategy, we think the most likely way the
taxpayers will be paid back is through an initial public
offering--remember, this is now a private company. And we think
that sometime in the near future, there will be an opportunity
to do an initial public offering for this company and in
connection with that, most likely we will convert some of our
preferred into common so as to give ourselves access to the
public markets to reduce our investment and repay the
taxpayers.
Mr. McWatters. Okay, so your view is that GMAC is solvent
today and will most likely not require any more taxpayer funds?
Mr. Bloom. I certainly hope so.
Mr. McWatters. If the CBO is correct and the taxpayers lose
anywhere near $10 billion on this investment, how can the pre-
bailout shareholders, equity holders of GMAC still be in
existence? I mean, is there a possibility that taxpayers will
take a $10 billion hit, but a shareholder, that, let's say,
owned GMAC in 2008 will someday receive a greater return?
Mr. Bloom. No, I think--I think the answer is that first
thing, the final valuation of what we receive is yet to be
determined. The CBO report I think you refer to refers to the
overall----
Mr. McWatters. It does.
Mr. Bloom [continuing]. In the auto space. That is subject,
obviously, to the particular investments and it is certainly
not impossible that we will not receive all of the money back.
That is not impossible.
I think the answer to your question, however, unfortunately
raises the practical question. Which is, the only way to
completely wipe out shareholders who have legal rights in the
other extent, is to go through a bankruptcy proceeding. And as
we've been dialoguing about before--and I've tried to explain,
and Jim as well, and you may not accept the explanation--but
the judgment was that a bankruptcy filing for GMAC was not a
prudent course of action under the circumstances.
So, there's been very, very substantial dilution, the
investments were made in preferred stock, the conversion prices
were set by arm's length valuations, so we believe we've
received as fair a value as was available, and the
alternative--which is to completely, entirely eliminate all
other shareholding interests--was one that was just not deemed
to be practical.
Mr. McWatters. Well, my time's up, so just let me recap. It
sounds like the taxpayers could lose a lot of money on this
transaction with the existing shareholders as of 2008 pre-
bailout----
Mr. Bloom. I don't think I said the shareholders could lose
a lot of money, I said there are scenarios where the
shareholders will not receive all of their money back. The
precise consequences of the investment and what the
shareholders--and what the government gets back--is yet to be
determined.
Mr. Millstein. May I just weigh in on that? I think it
highly unlikely that the independent third-party shareholders
of GMAC are going to get a return if the taxpayers of the
United States are not paid in full.
Mr. McWatters. Okay. Fair enough.
Chair Warren. So, I want to go back, then, to the question
about the dollars.
Mr. Bloom, you were just testifying that you thought that
the cost of a bankruptcy, in effect, what we would have to put
for DIP financing, would be somewhere in the range of $40
billion to $50 billion, is that right?
We've been having conversations, as you know, for the last
couple of months, and the numbers that have been quoted to us
by Treasury up to now has been about $6 billion per month, for
a total of somewhere between $10 billion and $18 billion for
what would have been required in DIP financing if GMAC had been
in bankruptcy. So, I'm puzzled about how the number grows this
morning to potentially $50 billion.
Mr. Bloom. The number had a very wide range associated with
it. The issue is that at that time, if GMAC had gone into
bankruptcy as Jim and you dialogued about before, all of their
securitizations, their conduits, would have gone into runoff.
And so all new origination of dealer financing and retail
financing would have had to have been done by somebody. And, at
the time, the only reliable somebody was the United States
government.
So, the question is, how long would the company have been
in bankruptcy for--which is quite hard to know, in fact, I
think unknowable at the time--and for the pendency of that
event, all new dealer originations, which roll off on a regular
basis, and all new consumer originations, would have had to
have been provided by the government, because that was the only
entity available.
Chair Warren. Well, but if we're talking about time, I
mean, I presume the possibility of a quick 363 sale, as
happened in the auto industry, could have made this a
relatively speedy procedure----
Mr. Bloom. No, because----
Chair Warren. But, it still doesn't help me understand why
it is that, in our conversations with Treasury to this point,
we have heard $6 billion per month and a total of $10 billion
to $18 billion as Treasury's own estimate, until this morning,
of what DIP financing would have----
Mr. Millstein. Madam Chair----
Mr. Bloom. Let me deal with the 363 and then Jim can talk
about the numbers.
Mr. Millstein. Yes.
Mr. Bloom. A 363 sale of GMAC would have been a 363 sale of
the platform. The new company would still have had to originate
car financing. So, whether it would have been a DIP or a
capitalization of the new company, all of the originations of
the--first thing, you would have had to have been successful
with the 363. Second thing, if you were successful with the
363, you still would have had to have capitalized the new
company with all origination funds that were required.
Chair Warren. I understand--I do understand that. And I
understand how this works.
Mr. Bloom. Okay.
Chair Warren. The difference is, that you're trying to
capitalize what is now a much stronger company.
Mr. Bloom. No question about that.
Chair Warren. Because you have wiped out its old equity----
Mr. Bloom. Right.
Chair Warren [continuing]. And you have wiped out some
portion of its old debt.
Mr. Bloom. No question about it.
Chair Warren. So, the notion that somehow we save money by
propping up a weaker, more impaired company than we do by
cleaning it up and putting it on the block just doesn't add up
for me.
Mr. Bloom. I think what I said was that weighing all of the
risks, we believed this was the most prudent course of action.
If everything had occurred absolutely perfectly, it might have
been optimum to do it that way. But what we had to take account
of in the real world was the cumulative execution risks that
would have occurred if we had all three of these companies in
bankruptcy at the same time. And given that it was now putting
at risk--it was our judgment--that it would put at risk the GM
and the Chrysler bankruptcies, the consequences of those
failures were, from our perspective, outweighed the risks that
might have occurred if everything had gone perfectly.
Chair Warren. So here's what I never understand about GMAC,
when we talk about this, when we try to read everything here.
It's that at some moments GMAC is so deeply integrated with the
auto industry, I notice the bailout did not come in its
capacity as a bank, in effect, it came through the auto
portion. And as a result, GMAC did not have to do the ordinary
things that a bank would have done in terms of under the
capital infusion program, they didn't have to give the same
kind of projections about their business plan, and so on. We
did this as part of the auto bailout.
But then, it shifts over. And you say, ``No, no. It's
really not like the auto industries, it's really an independent
bank, it's got a very different financing structure, we've got
to go ahead and bail it out.'' Only we didn't bail it out as
part of a bank bailout program.
So, it looks to me like this thing keeps moving back and
forth. I'm not understanding what's going on here, Mr. Bloom.
Mr. Bloom. Let me make two comments on that. One is,
obviously GMAC is a finance company. So, no question about
that.
Chair Warren. Of course.
Mr. Bloom. As you know, the prior Administration chose to
make the original infusion into GMAC under the auto finance
program.
Chair Warren. And why is that?
Mr. Bloom. I don't know why the prior Administration chose
to make the decision they made. But they did.
Chair Warren. So, they treat it as part of an integrated
approach to deal with the problem in the auto industry.
Mr. Bloom. I'm not commenting on what the prior
Administration did, I'm just observing what they did.
I think we chose not to move it, but it had already been
established there.
I also think--and Jim can give you more color on this--but
I don't think there is a substantive difference in terms of
which program they were financed under.
Mr. Millstein. All of these programs are under TARP. And
whether it's the----
Chair Warren. It's always the taxpayers' money.
Mr. Millstein. Exactly. And the TARP restrictions are
pretty uniform across each of the different programs in terms
of restrictions on executive pay, the luxury expense policies--
one incremental burden or requirement that would have been
placed upon GMAC had it been funded under the CAP program or
the CPP program, rather than AIFP--the automobile program--is
they would have been required to produce regular reports on
their lending activities.
Chair Warren. Yes, and are they doing that?
Mr. Millstein. But, in fact, they are doing that.
Chair Warren. So, you are having them follow the same
procedures they would have----
Mr. Millstein. It's part of our ongoing monitoring of this
entity that they provide us with that information.
Chair Warren. Thank you. I'm past my time.
Mr. Atkins.
Mr. Atkins. Okay, thank you. I just wanted to go back
quickly to the existing shareholders so that--not to beat that
one too much--but there are other ways to, you know, really
actually get rid of them besides reorganization or bankruptcy.
It happens all of the time in the VC situation where former
management has, you know, perhaps not done what's--what the
market wants--so new capital comes in and basically the old
guys are diluted out so much that there's really nothing left
and they basically hit the road unless they're insiders or they
have some special expertise to bring. You know, is that the
case here?
Mr. Bloom. Most of our investment is in preferred stock
which, by its nature, is superior to the common shareholder.
So, in fact, if there's not a return, common shareholders--as
Jim pointed out--don't receive recovery when preferred
shareholders aren't fully compensated.
So, I don't think as a practical matter, the shareholders
are getting--the old shareholders, excuse me--are getting
anything out of this thing if the government doesn't get its
money back.
Mr. Millstein. And in terms of just the structure of
investment, because this is actually something that we were
very concerned with, and we looked exactly at that model, in
terms of how to think about the next step, we hold $2.5 billion
of senior preferred in the capital structure, but we also hold
north of $10 billion of convertible preferred.
So, when the opportunity comes to access the public equity
markets in an IPO, we will convert that convertible preferred
in common--in whole, or in part--in order to access and find
ourselves an exit. That will be further substantial dilution to
the other shareholders.
Mr. Atkins. Okay.
Well, then let's look quickly, too, because time is short
here, with respect to the stress test. The one thing that this
panel has pointed out about a stress test is that basically
they only looked through this year, and not beyond. So, GMAC
recently had a 144A offering, where they raised $2 billion, but
at a pretty high price--even more than Ally Bank pays at its
advertised rates, 8.3 percent for 5-year notes--and so there is
$24 billion in debt coming due this year, $22 billion next
year, and $13 billion the year after.
At those rates, you know, with car sales still rocky and
this debt coming due, what is the outlook? It's solvent now,
but what's the outlook on capital in the future?
Mr. Millstein. Yes, let me see if I can address that, I
mean, it's hard to predict the future. If you look back a year
and a half there's been a little volatility in the markets, and
my guess is we'll see similar volatility going forward, good
and bad.
Clearly these finance companies--GMAC is not unique in the
problems it faces in terms of how it's going to fund itself
forward. And I think the funding program remains a work in
process. Clearly the unsecured credit markets--what they call
the wholesale funding markets, which is where this company
funded itself and other finance companies fund themselves
primarily in the period prior to the crisis--are in shaky
shape. There is unsecured financing available again, in the
long-term debt markets, but it is more expensive and the
spreads are higher.
And the fact that they've accessed the market is a good
start, but they've got, as you mentioned, work to do.
Mr. Atkins. Yeah, but even--oh, I'm sorry.
Mr. Millstein. So, what I was going to say is it's a work
in process. And in part, they've got access to deposits now
through Ally that they hadn't had before, which lowers their
cost of capital, but the wholesale funding markets have got to
come back. The ABS market, the Asset Backed Securities market,
is back. TALF was an enormous catalyst to getting those markets
to function again, the spreads have come down enormously there.
So, we're by no means out of the woods in this crisis, and
this company--as a finance company and a bank--is by no means
out of the woods, but it's gotten off to a good start.
Mr. Atkins. But if you compare these rates and this track
record with Ford, for example, and GMAC has huge government
backing, obviously, as the majority shareholder----
Mr. Millstein. That's right.
Mr. Atkins [continuing]. The majority stakeholder there,
you know, the market loves auto paper, so why is there this----
Mr. Millstein. You know, in fact, I mean, here's the--it's
more general phenomenon rather than GMAC-specific. Those rates
are right on top of where Ford Motor Credit is borrowing money
without government support. So, it's really a function of the
remaining dislocation in the unsecured, long-term bond market.
Chair Warren. Okay, I'm going to stop you there.
Mr. Atkins. Thanks.
Chair Warren. Superintendent Neiman.
Mr. Neiman. Following on this interdependence and
interconnectedness, have you, in any way, considered a strategy
of recombining GMAC and GM in recognition of that
interdependence and presumably also the viewpoint of the
capital markets? And, if so, what are the considerations on
both sides of that?
Mr. Bloom. There is no consideration of that going on.
GMAC's long-term strategy is an evolving thing, which we are
obviously very mindful of, but there is no active consideration
of that idea at the moment.
I think we've all learned--as Jim pointed out--from the
last year and a half to never say never, but no, that is not
something that's on the table at the moment.
Mr. Neiman. How about a strategy of encouraging alternative
sources of dealer financing to encourage competitors to GMAC to
foster a sound industry?
Mr. Bloom. Well, I mean, we do need to start by taking the
world where we find it. Roughly 80 percent of dealer financing
is provided by the captives of one sort or another. So, if you
kind of walk across the companies, they all have between 70 and
80 percent of their dealers provided by their captives. The
exception is, obviously, Chrysler which is sort of now part of
GMAC. But Ford does 77 percent, and the numbers are similar.
The largest single provider of dealer financing in the
third-party market, the unaffiliated market, is less than 2
percent of total dealer financing. Those banks are, obviously,
free and welcome to come and finance auto dealers, which would
be wonderful, you know, this is a competitive environment, it's
free to happen. But again, as Jim points out, the capital
markets--while enormously more stable than they were--are not
fully healed and banks are not rushing in, today, into that
market. So, we have to take what we have, and the reality is,
for 80 years the almost exclusive model for dealer financing
has been captives. Or, if you will, companies that specialize
in it.
And whether there's a new model that would need to evolve
over time is something certainly worth thinking about, but we
walk into this situation taking it as we found it.
Mr. Neiman. Now, recognizing that there is no assurance of
the viability of GMAC going forward, are there any contingency
plans being made for the assumption of this dealer financing
role in the event that GMAC was unable to provide dealer
financing going forward?
Mr. Bloom. I mean, General Motors and Chrysler, as part of
their long-term planning, I am sure, are looking at many, many
things. I would have to direct that question to them, though,
given the role we play.
I think we believe--as Jim has said--that GMAC at this
point is stable. Over the long term, is General Motors going to
be considering a variety of alternatives? Again, I would direct
that question to them.
Mr. Neiman. Do you have any comment?
Mr. Millstein. I mean, I'd have to--if Mr. Bloom is
unwilling or unable to share with----
Mr. Bloom. Unable.
Mr. Millstein [continuing]. Unable to share with you what
GM's strategic plans may be in this regard, I certainly have no
insight into that.
Mr. Neiman. Right.
Well, thank you. Recognizing that we have the executives
from GMAC on the next panel, are there any recommendations that
you would make to us now to make sure we explore, or maybe
areas of frustration that you have seen in your role at
Treasury that we should be sure that we explore in our next
panel?
Mr. Millstein. No, listen, I have to say I think that we've
got a very professional management team, a very good Board,
they've been very cooperative with us in answering our
questions and information requests, and I think they will be
very forthcoming with you, as well.
Mr. Neiman. That raises another point. In the AIG
situation, which you know extremely well, Treasury utilized a
trust to hold its shares. Is that something that was considered
here, or do you see benefits for those shares being held in
trust? And because they're not, what were the considerations--
--?
Mr. Millstein. I'll give you a little AIG tech time, but
just to correct the record, the Federal Reserve--when it made
its original investment in September of 2008--took 79 percent
of the shares of AIG and established--it established a trust.
Mr. Neiman. Right, correct, thank you.
Mr. Millstein. The Treasury preferred is actually held by
the Offices of Financial Stability inside of the Treasury
Department.
Mr. Neiman. So, was there any consideration of utilizing a
trust in this situation? Recognizing the difference?
Mr. Bloom. I think we have--both with GM and with Chrysler,
and with GMAC from time to time--we have looked at various
structural options and our conclusion is that it does not
enhance our position to do that.
Mr. Neiman. Thank you.
Mr. Bloom. Thank you.
Mr. Neiman. My time is expired.
Chair Warren. Mr. McWatters.
Mr. McWatters. Thank you.
Would you please provide a little more detail and color
respecting your exit strategy--how it will work and the timing
that you anticipate today?
Mr. Millstein. Yes. I think, as Mr. Atkins pointed out,
there's a significant wall of maturities on the debt side that
GMAC faces, and that they're doing a good job chipping away at.
This first offering of $2 billion of unsecured debt is part of
it.
We think until that wall of maturity is confronted and
dealt with, and successfully hurdled, it's unlikely that we can
sell stock in this company--you have to have a stable platform
going forward for stock and equity investors are longer term
investors. And so, the first path towards an exit, here,
requires the refinancing of the balance sheet, and creating a
longer runway of liquidity.
The management team and board know that, and they're
working hard at it. Assuming that is accomplished--and we're
hopeful it will be--we think that the, given that it's a
private company--the most likely path for us to facilitate an
exit is for an IPO to occur. And, you know, it's hard to know
what market conditions will be, whether they will be favorable,
but my guess is that we're looking at some time at least a year
out.
Mr. McWatters. Okay, thank you.
If GMAC is ``too big to fail,'' if it continues to be too
big to fail, what specific actions are you taking to negate
that? I mean, how do we know that a year from now we won't have
this problem again? Because you have two automobile
manufacturers that are building cars, but they're going through
this gridlock that is GMAC that will back up and stop
everything behind it. So, how are you addressing that?
Mr. Bloom. I think Jim has spoken about the very hard work
that we've asked the Board and the management to take on to
make GMAC a viable company. So, that is obviously our principal
strategy, and as I responded to--I think it was Superintendent
Neiman--General Motors and Chrysler are obviously deeply aware
of GMAC's circumstance, but I can't speculate because I simply
don't know exactly what the nature of their contingency
planning is.
But, as Jim says, we're trying to be very cautious about
this and not be more optimistic than the facts warrant, but we
do believe that GMAC has been stabilized, we do believe it has
challenges ahead, and so our principal focus right now is
supporting the management and the Board as they make this a
long-term, viable enterprise.
Mr. McWatters. But, my question is the creation of the
monopoly. GMAC has become a greater monopoly with respect to
the ability to finance floor plan for Chrysler and GM dealers.
If there were other competitors out there, we wouldn't have had
this problem, right?
Mr. Millstein. That's right.
Mr. McWatters. A year ago, GMAC would have----
Mr. Bloom. I'm not sure how they're more of a monopoly. I
mean, their share of GM dealers is about what it was.
Mr. McWatters. I know, but they have the implicit guarantee
of the United States government, it's very difficult to compete
against that.
Mr. Bloom. I'm not sure I agree with that.
Mr. McWatters. That's fine.
Mr. Millstein. Mr. McWatters, when you have the next panel,
I think you should explore with the management team why it is
that the dealer financing market is dominated by, effectively,
the affiliates of manufacturers or former affiliates of
manufacturers. There's a reason which, I think, they can
explain to you better than I can, because whatever I would tell
you would have come from them.
But, I think there are good and valid reasons for why each
of the manufacturers sort of dominates the financing of its
dealers.
Mr. Bloom. And, again, going back in history, the dealers--
there were dealers who chose to not finance with the captives,
historically, but it was a very small group. And they were able
to do it, but the fact is--as Jim points out--there is quite a
bit of expertise in organizing this platform. It is less true
on the retail side, but on the dealer side, this is a very
specialized kind of lending. And banks, historically, were free
to go into it if they wished to, but most have taken very, very
small positions in the aggregate.
Mr. McWatters. Okay. Thank you.
I'll stop there.
Chair Warren. Thank you very much.
Mr. Bloom, Mr. Millstein, I appreciate your coming today.
We ask that you stay, if you can, during the next two panels.
We may have some questions we want to ask at the end. I know
you have very difficult schedules, but we would be grateful if
you could stay and hear the rest of the witnesses.
With that, you're excused for now, the record will be held
open for additional questions that we may send, but we
appreciate your appearance here today.
I ask Mr. Carpenter and Mr. Hull to come and sit. While
they are coming our way, I will introduce them.
Michael Carpenter is Chief Executive Officer of GMAC
Financial Services, and Robert Hull is Chief Financial Officer
of GMAC Financial Services.
Thank you both for being here with us today, we appreciate
it. As soon as you're settled, Mr. Carpenter and Mr. Hall, I'll
ask each of you if you'd like to make opening remarks. We ask
that you hold them to no more than five minutes. We will put
any written remarks in the record that you wish to have printed
there.
So, Mr. Carpenter.
STATEMENT OF MICHAEL CARPENTER, CHIEF EXECUTIVE OFFICER, GMAC
FINANCIAL SERVICES
Mr. Carpenter. Good morning Chair Warren and Panel members
Atkins, Neiman, and McWatters.
On behalf of GMAC and its approximately 19,000 employees,
we are extremely grateful for the investment from the U.S.
government in our company at a time of unprecedented
international financial turmoil, we view repayment of that
investment as our highest priority along with operating the
bank with the utmost attention to safety and soundness.
I joined GMAC as CEO in November of 2009 and have the
perspective of serving on its Board of Directors since May of
2009.
The capital investment by Treasury has been critical in
allowing GMAC to support the domestic auto industry's
revitalization. GMAC has a unique position in the auto industry
as one of the largest providers of credit to dealers and
consumers, and we are able to hold that position in large part
because of our infrastructure, our history in the business, and
the experience of our employees.
At the end of 2009, GMAC supplied 90.9 percent of GM dealer
floor planning financing and 77.3 percent of Chrysler dealer
floor planning financing in the U.S. This type of financing is
vital for these small businesses to have inventory on their
lots, and is not generally available from banks.
Given the lack of liquidity from other sources during the
financial crisis, it is fair to say that without the government
support of GMAC, thousands of GM and Chrysler dealers would not
have survived, and tens of thousands of their employees would
have been thrown out of work, and many thousands of consumers
would not have been able to buy GM or Chrysler vehicles.
After I took over as CEO at the end of 2009, GMAC took
substantial write-downs and reserves, primarily in our legacy
mortgage business, in order to position GMAC for the future.
Importantly, these restructuring actions have allowed GMAC to
demonstrate to the capital markets that we have ``ring-fenced''
the risk of our mortgage business.
These actions allow us to access the capital markets, in
February, for the first time since 2007, raising $2.0 billion
of unsecured debt funding.
As we look ahead, GMAC is focused on six strategic
objectives. First and foremost, our mission is to be the
premier automotive finance franchise across multiple brands.
Automotive financing is our core business and we have the
infrastructure, talent and experience to expand this area of
our business.
Our second objective is to reduce our cost structure and
ensure that GMAC is a low cost, high service competitor.
Our third objective is to continue to improve our access to
the capital markets in order to ultimately repay Treasury's
investment, and our reentry to the unsecured capital markets
this month was a critical first step.
The fourth objective in our plan is to fully transition to
a bank holding company model and ensure that we operate at a
high standard of safety and soundness.
Our fifth objective is to improve our ongoing liquidity
position by building a stable base of deposit funding at Ally
Bank. Previously, GMAC was a wholesale funded finance company,
and as demonstrated by the capital markets disruption, funding
diversity is critical to any financial firm.
And sixth, we are focused on continuing to address the
challenge related to our legacy mortgage business in order to
minimize any future impact on GMAC. The actions taken at the
end of 2009 were significant, and we are now exploring
strategic alternatives for the mortgage business which minimize
risk to GMAC, but continue the important role of ResCAP as the
fifth largest mortgage servicer to three million homeowners
with $376 billion of outstanding mortgages.
As I have described, the support received from the U.S.
government has been critical in allowing GMAC to play an
important role in the rebuilding of the U.S. auto industry and
positions the company for future success.
GMAC has made approximately $1.0 billion in dividend
payments on the taxpayers' investment so far and plans to repay
the U.S. government in full over the next several years.
Our financial plan anticipates that as the company's
financial performance improves during 2010 and beyond, the debt
capacity will be available at more competitive rates. More
importantly, we and our financial advisors believe that an
initial public offering should be possible sometime in the next
two years, and this would allow us to return to being an
investment grade company, reduce our overall capital intensity,
and begin paying back the U.S. taxpayer in full.
Finally, as requested----
Chair Warren. Can I ask you to stop there? And, please,
give us all of your written remarks and we'll put them in the
record.
Mr. Carpenter. Absolutely. Thank you.
[The prepared statement of Mr. Carpenter follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. All right. Thank you.
Mr. Hull.
STATEMENT OF ROBERT HULL, CHIEF FINANCIAL OFFICER, GMAC
FINANCIAL SERVICES
Mr. Hull. Sure. Good morning, Chair Warren and Panel
members Atkins, Neiman, and McWatters.
Thank you for the opportunity to address a few topics on
behalf of GMAC which include the impact of the TARP investment,
the manner in which that assistance contributed to our
financial stability, and our ability to support the auto
industry.
I will also address the effects that GMAC's restructuring
and other strategic initiatives are expected to have on our
future financial performance. The government assistance
provided to GMAC was critical to stabilizing the company and
the U.S. auto industry, and we are grateful for that
assistance.
As a result of the U.S. Treasury's investment in GMAC, we
strengthened our capital ratios and can continue to provide
roughly $30 billion of wholesale financing to auto dealers and
to service approximately $60 billion in consumer auto loans.
Auto finance companies, like GMAC, are critical to the auto
manufacturers' ability to sell vehicles. Automotive sales are
dependent on the availability of dealer inventory and the
financing available to retail consumers. In the fourth quarter
of 2008, the lack of stability in the global capital markets
coupled with GMAC's need to preserve capital, required us to
largely shut off consumer auto financing. After receipt of the
initial TARP investment in December of 2008, we were able to
lift the restrictions and offer retail financing for consumers.
We've now returned to more normal levels of consumer financing
volume, and have helped stabilize the U.S. auto industry. This
translates into roughly $6 billion of new retail auto financing
per quarter from GMAC.
Now, let's turn to the financing of auto dealers, some of
the most important small businesses in the United States. By
the second half of 2008, GMAC's ability to finance the
inventory of GM dealers was severely constrained. Auto dealers
finance their vehicle inventory through line of credit
arrangements with finance companies like us, and without that
financing, dealers can't buy cars from the manufacturers.
Given GM and Chrysler's financial instability over the past
year, as well as an overall contraction in lending, vehicle
inventory, or floor plan financing, through traditional banks
has been scarce to non-existent for them. GMAC has served in a
unique role that worked with both auto makers to support their
dealer networks.
Let me now turn to GMAC's capital restructuring, if I
might. Historically, GMAC funded itself by accessing the
secured and unsecured capital markets in obtaining financing
from other banks. With the mortgage crisis of the last two
years, our mortgage sub incurred losses that reduced our
capital levels. Weaker economic conditions and reduced consumer
spending also had an effect that drove used car prices down. As
a result, GMAC's financial performance was impaired, further
reducing our capital levels. This hurt our debt rating, which
in turn led banks and unsecured creditors to view GMAC as a
higher-risk credit, and to decrease their unsecured lending to
us, and therefore GM and the dealerships. The broad disruption
in the capital markets exacerbated this situation. From 2007
through 2009, the company was unable to access the unsecured
market without government assistance.
Throughout 2008, GMAC completed a number of funding
transactions, nonetheless. We restructured $46 billion of bank
lending commitments, we completed two very large bond exchanges
and we sold many non-strategic businesses. Even still, GMAC's
liquidity and capital position continued to erode.
In the fourth quarter of 2009, our capital position
improved thanks to substantial investments from the Treasury,
which you know about. Along with our capital structure, our
liquidity profile also materially improved due to $11 billion
of net deposit growth, the issuance of $7.4 billion of debt
through the TLGP program, and reentering the securitization
market in 2009 with $1.8 billion of new funding aided by the
TALF program.
The increased liquidity and capital as well as the steady
performance of our portfolio enabled our auto business to
return to profitability in 2009. At the end of 2009, we
undertook several actions to strengthen the capital position
and to minimize the ongoing risk of the legacy mortgage
business. Details of the capital actions are listed in my
written testimony. At the end of 2009, GMAC's total capital
ratio was a healthy 15.5 percent, which significantly exceeds a
well-capitalized standard of 10 percent.
In summary, while GMAC has experienced recent financial
difficulty, 2009 was a transformational year for us. We made
great strides in strengthening our $170 billion balance sheet,
improving our capital and liquidity positions, and have
returned in 2010 to the capital markets, as you know, without
further government support and are now focused on profitability
and repaying the U.S. Treasury as quickly as possible.
Thanks again for the opportunity to speak with you and we
welcome your questions.
[The prepared statement of Mr. Hull follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you very much, Mr. Hull.
So, what I'd like to start with is--I just want to make
sure I understand the business model. Does GMAC cross-subsidize
the sale of GM cars? Is that how this works? Is there a cross-
subsidization that takes place, here, between GM and GMAC?
Mr. Carpenter. Go ahead.
Chair Warren. Either one--Mr. Hull, Mr. Carpenter, whatever
is easiest for the two of you.
Mr. Hull. Sure.
No, GMAC does not cross-subsidize the sale of cars.
Chair Warren. So, you don't offer cheaper financing than
anyone else does in order to support the sale of GM cars?
Mr. Hull. Actually, we do offer that, but that's not--GM
provides that subsidy, it's essentially a marketing expense,
it's called subvention in the industry. So, if you see a zero
percent rate on a car, in a dealership, GM has effectively paid
for that rate under what would be our standard rate.
Chair Warren. All right, so GM is offering, in effect, to
pay a portion of the consumer's finance cost, and they offer it
exclusively to you, or do they offer that to other financial
institutions? Would they offer that to another bank, for
example?
Mr. Hull. They offer it through us, but they have the
ability to go elsewhere with a new----
Chair Warren. I'm sorry, ``they'' meaning the consumer?
Mr. Hull. No, ``they'' being GM. So, GM offers that
exclusive--that subvented financing through GMAC, but they have
the ability to go elsewhere over the course of the next several
years, if they want to do it.
For example, they can offer programs, other leasing and
retail lending programs through other players. We do have a
first right at it, but they have the right to go elsewhere.
Chair Warren. So, right now, your business model is that
you have the exclusive right to sell, in effect, zero percent
financing on GM cars and get the difference from GM.
Mr. Hull. It is a large part of our business.
Chair Warren. This is a large part of your business. Is the
same true, also, with dealership financing? Or is there
something different about the arrangement in dealership
financing?
Mr. Hull. It's completely different.
Chair Warren. All right.
Mr. Hull. So we would fund a dealership, the thirty----
Chair Warren. In the same way that anyone else in the
market would?
Mr. Hull. For the most part, that's right. And the only
difference with the dealership is that they see us as an
integral part of the relationship with the manufacturer,
because we know them, we've known them for 90 years and they
know that we know how their systems work, and we're able to
deliver to their needs and on the timeframe that they have.
But there absolutely are commercial floor plan arrangements
with unaligned finance companies.
Chair Warren. So, you see yourself as having two
advantages, then, in the marketplace, if I'm understanding this
correctly. That is, that you have a deal with GM to get money
from GM and offer--this is how you build up a big volume--offer
what appears to be, to the customer, below-market financing.
And your other part is simply that you know the dealership
world.
Mr. Hull. That's right.
Chair Warren. Is that a fair----
Mr. Carpenter. I would add to that--we are--from a systems
point of view--integrated with the dealers and the
manufacturers. So, to help you visualize it, if you imagine a
dealer placing an order for an automobile from GM for a
particular VIN number, we will finance that purchase when the
sale is made by the dealer, we will get reimbursed. It's a
closed loop system.
And being part of--an integral part of--that system is both
beneficial to the manufacturer and to the dealer and also
reduces the credit risk of the business substantially.
Chair Warren. Okay. So, I understand why GM would want to
finance its dealers and why it would want to finance the sale
of its goods; many businesses do this. What I don't understand,
then, is what the justification is for being an independent
bank that takes deposits that has a backup from the United
States government. There are lots of businesses that finance
the sale of their goods, but they're stuck with that as part of
their internal model, internal pricing, internal profits--and
they don't reach federally insured deposits, and they don't
reach a backup from the United States government.
So, why, in this case, do you function in this very
integrated way that makes you look like simply a financing arm
of GM and yet you get all of the benefits of being an
independent bank?
Mr. Carpenter. Let's break the question, I think, into two
parts. There are many manufacturers, obviously, that provide
financing for their products--whether it be copy machines or
whatever it is. Some of those manufacturers have their own
captive finance companies that are not banks, other companies
contract with third-party vendor finance providers like GE
Capital. And you have both models in existence.
So, that's the answer to the first part of the question.
You know, with regard to the second part of the question, this
is--in my judgment--a very attractive business for a bank with
insured deposits. And the reason that I would say that is that
if you look at all of the asset classes that a bank could lend
to--if you look at the history over many, many years, the risk
characteristics of this asset class are the most favorable of
any asset class.
For example, the loss ratios in dealing with automobile
dealers with the system that we have of integration, is
somewhere around 10 to 20 basis points. And so----
Chair Warren. I would think that it would be attractive to
other----
Mr. Carpenter. And so, as a credit----
Chair Warren [continuing]. Other banks.
Mr. Carpenter. The creditworthiness of the banking activity
is extremely high, and the degree of comfort of using federally
insured deposits to finance those, should be extremely high.
Chair Warren. All right. We're over our time, so I'm going
to let Mr. Atkins pick up.
Mr. Atkins. Thank you very much.
Well, let me just pick up in that vein because part of the
justification that Treasury was using to bail out GMAC was that
it would be so difficult for other types of banks to step
into--especially the floor plan financing--of dealers.
But, as we've seen, the market really likes this paper and
it's obviously very high quality----
Mr. Carpenter. Yes.
Mr. Atkins. And they like it better than mortgages, I
guess. So I guess my real question is, you all basically
subsumed the old Chrysler Financial and integrated it into your
system and it sounds like, without much of a hitch. And as we
all know, system integrations typically have lots of hitches.
And so I just want to get back to the question of why is
there so little competition? Why do not other financial
institutions step into this? You have high-quality paper, it
sounds like it's not that hard to integrate into existing
things, you have VIN numbers and other things to keep track of
inventory, what's the deal here?
Mr. Carpenter. It's a great question.
Let me start by making the observation that there are
numerous sectors in the financial services industry that banks
do not participate in that have been the province of finance
companies, historically. I spent 10 years at GE Capital, almost
every business we ran was a business a bank had exited. And, so
if you look at factoring and specialty leasing and a lot of
different businesses, they're businesses that banks don't
participate in, because the value of being a focused competitor
is extremely high.
Now, having said that, your observations about the credit
characteristics of this asset class, the receptivity of the
marketplace for auto paper is absolutely correct. And I think
the barrier to entry, if you will, is not money and cost of
money--it's infrastructure and the knowledge--it's the
knowledge of the automobile business, how automobiles are dealt
with in the wholesale channel, the retail channel and the
systems that are acquired and the relationships that are
necessary to manage that business over time represent a very
significant barrier to entry.
Now, is it a barrier to entry that a major bank could
overcome over many years? Absolutely. It would cost a great
deal of money and historically they have not shown the appetite
to do it. So, if you look at which of these dealers actually
get financing from banks, they fall into two categories. One is
the local bank down the street, where the bank is taking a very
different risk. We're a secured lender, they're taking a risk
on the business, the character of the business person in the
community. And the other characteristics are some of the
largest--often public--dealerships which are of interest to the
larger banks, just like any other major commercial credit.
Mr. Atkins. Okay. All right. Well, thank you.
Let me move onto, then, other aspects, because obviously we
don't have a lot of time.
With respect to ResCAP, you know, clearly I don't know the
whole history of getting into that line of business, because if
it sounds like this is a great business and Ford Motor Credit
didn't get into that line, to use them as an example, what do
you see as the value of ResCAP now? I mean, as far as both
intrinsically and how does it add to the mix? Right now it's
the great sucking sound, so----
Mr. Carpenter. I think that's a great question, Mr. Atkins.
The history is that General Motors decided to diversify its
financial services business many years ago and built up this
mortgage banking business. For GMAC, over the last several
years, it has been what I have described, publicly, as a
millstone around the company's neck. It has been the single-
greatest barrier to the company's access to the capital
markets, it has been the greatest barrier on our profitability
as an enterprise.
So, I look at ResCAP as a problem to be solved, not as an
opportunity. And as such, the actions that we took at the end
of last year--and, by the way, the mortgage marketplace, in
general, has been a minefield for many, many companies, as you
know only too well. And so, the focus of our activities has
been--or my activities since joining the company--has been to
quantify the risk in ResCAP, to ring-fence that risk, and over
time, to minimize that risk so that GMAC is freed from that
burden, going forward.
Chair Warren. Thank you.
Mr. Atkins. My time is up.
Chair Warren. Mr. Neiman.
Mr. Neiman. Thank you. I'd like to follow-up on that line
of questioning, because this is really critical to the
strategic plans going forward. And you talk about exploring
strategic alternatives for ResCAP and the mortgage business,
and also ring-fencing the mortgage exposure. Can you go into
that in a bit more detail, and specifically, I'd like to
understand, has there been a decision with respect to divesting
the mortgage business, and understanding--well, I should stop
there. Has there been a decision to divest ResCAP?
Mr. Carpenter. Mr. Neiman, I would say this--our focus has
been to de-risk ResCAP as it relates to GMAC and its principal
mission in the auto finance segment. The first step in doing
that was to mark the mortgage assets to fair value, to put
additional reserves in the company, and to make sure that our
MSR, which is our Mortgage Servicing Rate asset, was fairly
valued. And that was the agenda for--for the fourth quarter of
last year, which puts ResCAP on a sounder footing, going
forward.
When we talk about exploring strategic alternatives, what
we're trying to do for the U.S. taxpayer is maximize the value
of that set of assets. That could mean anything from a sale of
ResCAP in its entirety, to the sale of individual assets, some
of which are ongoing, to the joint ventures or any other
transaction or approach that companies typically refer to when
they talk about pursuing strategic alternatives.
Mr. Neiman. So, in developing your strategic plan you set
out six areas of strategic objectives----
Mr. Carpenter. Yes.
Mr. Neiman [continuing]. Where are you in the process of
developing and disclosing a strategic plan? And I'd be also
interested in the approval process for that plan, the timing.
Mr. Carpenter. Good question.
We have engaged two major securities firms to help us
analyze the numerous alternatives for this asset. And there are
many, and the solutions are going to be complex. And so we have
engaged two major Wall Street firms to help us through that
process.
They have just begun their process. My expectation is, in
the next several months, two or three different alternatives
will be analyzed. We will then, as the normal course, present
those alternatives to our Board of Directors, with a
recommendation from management as to how to proceed.
In the meantime, we are actually already in the process of
selling some of the mortgage assets where we think the timing
for those asset sales is now. And the objective is to end up--
as we head towards the IPO--with not having to have a
conversation with this panel or any other--about our mortgage
business, going forward.
Mr. Neiman. So, can you share with us your current thoughts
and how you're addressing the pros and cons of being a diverse
financial institution with a mix of assets, a very serious a
mono-line institution which is even a captive mono-line and the
risks that come with that?
Mr. Carpenter. That is a great question and I would say
this--diversity is a good thing, but some of the things that
we're diversified with don't exactly help. And so the context I
would give is this--there are mono-line, or narrowly based
banks. A number of the credit card organizations are, in fact,
banks, and they are, in fact, mono-lines.
I think you have to look at what are the risk return
characteristics of the balance sheet to judge whether or not
one is comfortable with that lack of diversity. And I would
simply make the argument--as I did a moment ago--that of all of
the asset classes, the auto finance asset classes at both the
dealer level and the individual consumer level--are among the
absolute lowest risk loans that any kind of financial
institution can make.
And so, I would make the argument that if you are to be
very focused in an asset class, this would be the asset class
you would be most comfortable being focused on as a bank.
Chair Warren. Mr. McWatters.
Mr. McWatters. Thank you.
And thank you, gentlemen, for appearing today.
On a fair market value basis, is GMAC solvent?
Mr. Carpenter. The answer is yes, but I'll let Rob give you
the specifics.
Mr. Hull. I think Mike's right. You know, we have tried
to--I think so----
Mr. McWatters. Okay.
Mr. Hull. We have fair-valued a lot of our assets, Mr.
McWatters, and certainly on the ResCAP side, the broad base of
our assets. So, strictly on the basis of our accounting
statements, we've got $20 billion of equity on our books, and
that would imply that our assets are greater than the attendant
liabilities. Whether you can sell them at a market-clearing
price, that has to be tested.
Mr. McWatters. Sure. Do you anticipate that GMAC will
require a fourth round of taxpayer-funded bailouts?
Mr. Carpenter. That's certainly not our expectation. Our
actions we took at the end of the fourth quarter were quite
far-reaching and we believed--we believe--are unlikely to
require additional capital from the Treasury.
Mr. McWatters. Okay.
Do you believe the taxpayers will be paid in full or will
there be a shortfall as the Congressional Budget Office
anticipates?
Mr. Carpenter. The business plan that we have developed--
which obviously is based on a series of assumptions about,
among other things, the vitality of the capital markets--would
lead me to the conclusion that we have a high likelihood of
repaying the U.S. Treasury and the U.S. taxpayer, in full.
Mr. McWatters. Why do you think there is such a material
difference between your internal analysis and the CBO's
analysis?
Mr. Carpenter. I have not read the CBO's analysis--maybe
you have, Rob?
Mr. Hull. No.
Mr. Carpenter. I haven't read the CBO's analysis and so I
couldn't answer that question.
Mr. McWatters. Okay, then when do you anticipate the $17
billion then will be repaid in full?
Mr. Carpenter. Well, I think the first step, as we
mentioned a moment ago, is to access the debt capital markets.
Because any bank or any finance company depends upon its
ability to access the debt capital markets. We've crossed that
bridge in the last month or so.
The second challenge is to return the organization to a
reasonable--a respectable level of profitability which I
believe we're on track to do. That, in turn, will position us
to be able to take the company public.
Now, we're not going to be able to do a $17 billion IPO, in
all likelihood. And therefore, the initial public offering will
be at a more modest size than that, and that will then require
subsequent offerings to completely exit the U.S. Treasury.
Our financial advisors are telling us as long as we execute
the plan that we are embarked upon, that certainly we can
undertake the IPO in the next year or two and then repay the
rest of the money shortly thereafter.
Mr. McWatters. Is ResCAP fixed?
Mr. Carpenter. That's a very absolute question, and I can't
give you an absolute answer. I would say within the realms of
reasonable business judgment, we have contained the foreseeable
ResCAP risk. There are obviously a variety of scenarios in
which ResCAP could be more problematic. For example, if we see
a substantial double-dip in house prices, that would certainly
put some stress on ResCAP.
Mr. McWatters. Has ResCAP originated any loans which have
been securitized and that are now being put back to ResCAP?
Mr. Carpenter. The answer to that is yes.
Mr. McWatters. Do you know the dollar amount of that?
Mr. Carpenter. I don't have it off the top of my head, but
we could certainly get you those numbers.
The way this works is if a Fannie Mae or a Freddie Mac
reaches the conclusion that they believe there was inadequate
underwriting on loans, they have the right to put back those
loans to us, or claim a credit from us.
We have established--in the last two quarters--a total of
$1.3 billion of reserves against exactly those claims on the
ResCAP balance sheet, which we believe is an adequate reserve.
Mr. McWatters. Okay, I'm done.
Chair Warren. Okay.
I'd like to ask just a little bit about the current status
of your lending. Perhaps let's start on the consumer side.
Could you just bring me up-to-date, Mr. Hull, a little bit on
GMAC's lending to consumers right now? Are they lending, the
volume, the comparison in volume--what's going on there?
Mr. Hull. Sure. GMAC has been on a steady uptick since
receiving funding in the fourth quarter of 2008. We did about
$6 billion of consumer auto receivables in the fourth quarter
and about $18 billion of volume on the mortgage side in the
fourth quarter. And our commercial business worldwide----
Chair Warren. I'm sorry, I just want to make sure I'm
following--the $18 billion is new loans?
Mr. Hull. Right.
Chair Warren. Placed new loans?
Mr. Hull. Right, right. So eight----
Chair Warren. I just want to follow.
Mr. Carpenter. But, these are all to be securitized. We
just inventory them----
Mr. Hull. Right.
Mr. Carpenter [continuing]. And securitize them. We're not
investing in mortgages.
Chair Warren. Okay. That's what I want to know.
Mr. Hull. Right, so on the mortgage----
Chair Warren. Okay, so you're bringing them in, you're
securitizing them, and moving them on out, and the same is true
of the auto loans?
Mr. Hull. Not necessarily.
Chair Warren. You hold those?
Mr. Carpenter. The auto loans are--some are securitized,
and as Mr. Millstein was describing earlier on, those markets
have become a little bit more friendly over time, and others
are funded on balance sheet--both at Ally Bank and GMAC.
Chair Warren. Okay.
And as a proportion of GM sales--I just want to stick with
the auto loans for a minute--as a proportion of GM sales, what
proportion are you financing relative to three months ago, six
months ago, a year ago, a couple of years ago--I'm just trying
to get a----
Mr. Hull. A year ago when credit was unavailable to us, we
were really down to zero, by and large, close to it. We're now
at roughly a third--on the retail auto side--of GM's volume,
and so----
Chair Warren. Oh, wait, I got a little lost. So, when
financing was very hard to get for autos, you went to zero?
Mr. Carpenter. Let me explain. When the financial crisis
was at its worse, what happened was GMAC had limited liquidity.
What it chose to do as a matter of policy was protect its
ability to finance dealer inventory.
Chair Warren. Okay.
Mr. Carpenter. The result of that was we didn't have enough
capacity to fund retail sales. And so our share of retail sales
dropped to, I believe, it was 6 percent.
Mr. Hull. Yeah.
Mr. Carpenter. Six percent of GM's retail sales. Which, you
know, the good news is we saved the dealers, the bad news,
there weren't a lot of sales being financed.
Today we represent, depending on the month, somewhere
between 30 and 40 percent of GM sales, at retail.
Chair Warren. And, let's just talk pre-crisis for a
minute--2007, what was your percentage?
Mr. Carpenter. It would have been in the mid-forties.
Chair Warren. Mid-forties? So, you're not quite back----
Mr. Carpenter. We're not quite back, but we're getting
back.
Chair Warren. And on rates? Are you competitive with
others----
Mr. Hull. Right.
Chair Warren [continuing]. In what you charge?
Mr. Hull. We're highly competitive at standard rates, we do
our best to be as competitive as possible, given our cost of
funding, and then of course, you have the subvented rates,
which you and I discussed earlier.
Chair Warren. That's right--but, in total, you would say
it's the same, pretty much, as you could get if you went to a
bank or you went to a credit union or some other financing
source?
Mr. Hull. You can always--yes.
Mr. Carpenter. Yes.
Mr. Hull. Yes.
Mr. Carpenter. Within 25 basis points, usually.
Chair Warren. And then, if we could just talk about the
dealers for a minute. I just want to get a picture of what's
going on.
Mr. Carpenter. Sure.
Mr. Hull. Sure.
Chair Warren. With the dealers, you're still financing
about the same proportion of dealers that you did, say, pre-
crisis in 2007?
Mr. Hull. Similar. I mean, we're trying--and now we've
added Chrysler to that equation and we're at, you know, similar
penetration percentages overall with them, plus or minus.
Chair Warren. Okay. Plus or minus, you would say it's about
the same, and that's the one you're telling me did not go down?
Mr. Carpenter. Correct.
Chair Warren. During the crisis, that's the one that you
held steady?
Mr. Hull. Exactly.
Chair Warren. How about the rates? The rates that you
charge? The interest rates on these loans?
Mr. Carpenter. Well, I think the rates that we charge to
the dealers are, I want to say competitive, but the reality is,
I don't think many of these dealers have a lot of alternatives.
Chair Warren. Okay.
Mr. Carpenter. And so, I would say relative to what I would
call the general creditworthiness of the dealer community,
they're actually pretty attractive.
Chair Warren. Can you give me an idea of what the rates
are, generally, that dealers are paying?
Mr. Carpenter. It varies. Do you know off-hand?
Mr. Hull. It----
Mr. Carpenter. I was going to say somewhere around six?
Mr. Hull. Right. That's fair.
Mr. Carpenter. Six percent.
Chair Warren. About six percent?
Mr. Carpenter. Something like that.
Chair Warren. And when you say it varies, I'm just
curious----
Mr. Hull. It's credit.
Chair Warren. You make individual assessments of the
creditworthiness of each of the dealerships?
Mr. Carpenter. The creditworthiness of dealerships and also
what are we financing? For example, if we finance a mortgage on
their facility, that would obviously carry different terms and
conditions----
Chair Warren. Of course.
Mr. Carpenter [continuing]. Than financing automobiles.
Chair Warren. Okay, all right. That's very helpful. Thank
you.
Mr. Atkins.
Mr. Atkins. Professor Warren wants an angle on negotiating
your next purchase, maybe. [Laughter.]
Mr. Carpenter. I don't think we're allowed to do that.
Mr. Atkins. No, I just meant, figure out what the other
side is paying.
Just one quick question before we get on to another topic.
Do you all have any barriers to entry, do you have any designs
on financing Ford or Toyota or other dealers? Or is there such
a brand loyalty that people don't do that?
Mr. Carpenter. Well, I think that is a very good question.
And one of the answers to your earlier diversity question is,
if we can, in fact, diversify the mix of brands that we do
business with, that is actually helpful. And so we would like
to do that over time. We're in the process of talking to some
smaller organizations currently. I think that the bank model is
sufficiently attractive relative to the captive finance model,
that if we can demonstrate an equivalent level of service to a
captive that we can, over time, demonstrate a very attractive
proposition for other manufacturers. But that's not this year's
business, or probably next year's.
Mr. Atkins. Have you thought about changing your name? That
might help.
Mr. Carpenter. We are actually in the process of changing
our name, this year.
Mr. Atkins. Okay.
Mr. Carpenter. We're going to Ally Bank. We're going to
Ally as the brand name we use.
Obviously, if you're the Chrysler dealers, and I can
imagine, if I were a Chrysler dealer and I'd been competing for
40 years with the GM dealer down the street, I don't really
like doing all of my business on GM paper.
Mr. Atkins. Right.
Mr. Carpenter. So, we're trying to be responsive to that.
Mr. Atkins. Okay.
Well, I want to turn now to politics, but with a small
``p,'' not a big ``P'' like here in Washington, because as
Chairman and Chief Executive, you have to deal with a Board,
you want the board behind you. And you have to, obviously, now
deal with a big majority shareholder who is choosing these
board members.
So, I'd like to understand that relationship, between you
and Treasury. Do you talk to them daily, weekly, monthly? How
do you deal with your board members? Do you find them--well,
I'll leave it at that for now.
Mr. Carpenter. Well, let me start with the Board. I joined
the Board, as I said, in May of 2009 and in the period between
May and taking over as CEO, we had 36 board meetings. So, this
has been a very, very active board of directors, it's a very
capable and knowledgeable board of directors and it has spent
an enormous amount of time learning the business and the
issues.
And so, it has currently two Treasury-appointed board
members and as Jim mentioned earlier on, there will be another
two Treasury-appointed board members, and one other board
member.
So, it's a very active board, it takes its governance
responsibilities very seriously. It takes its relationships
with the Fed and the FDIC on safety and soundness also very
seriously.
With regard to our relationships with the Federal
government, we clearly have a number of important
relationships. We have an important relationship with the Fed,
as a major regulator, and we have ongoing--I would say,
probably daily dialogue, not myself, but--daily dialogue with
them, and I have a meeting at least once a month with my
management team, and the Fed, on a whole array of compliance-
related issues.
We have a similar relationship with the FDIC, which is
currently focused on Ally Bank, which is very important to us,
and so those are relationships which are challenging. They
challenge us, constantly, to do a better job.
Mr. Atkins. Do your board members realize that they have a
fiduciary duty to the shareholders as a whole? Or do you think
that they view themselves as representing Treasury?
Mr. Carpenter. I think the Board has a responsibility--
realizes it has--a responsibility to the shareholders and the
stakeholders, as a whole, but we're very mindful of the fact
that Treasury owns 56 percent of the company on a fully-diluted
basis, much more than that.
Mr. Atkins. I just want to make sure that these guys don't
view themselves as government flunkies, basically----
Mr. Carpenter. Absolutely not. Absolutely not. One of the
things that was decided early on in the establishment of the
Board was there was an extensive dialogue with Treasury as to
whether or not all of the board members could, in fact,
function as equal partners in the Board, and in fact that was
affirmed.
With regard to Treasury, I would say, first of all, it's
been a very positive relationship. To be able to get the last
round of financing done between the time I joined the company,
on the 17th of November, and the 23rd of December, showed a
remarkable degree of responsiveness and competence on the part
of Treasury.
I would describe the interactions that I've had with
Treasury as being those you would expect of a concerned and
committed shareholder. We have had discussions in which, you
know, I and my team have been challenged, strongly, on many
issues----
Chair Warren. I think we're going to have to stop there,
Mr. Carpenter.
Mr. Carpenter. Thank you.
Chair Warren. But we have the point. Thank you.
Mr. Neiman.
Mr. Neiman. I'd like to shift to a subset of issues around
ResCAP in your mortgage business.
As you know, our panel has taken a particular interest and
emphasis on the foreclosure crisis and overseeing the
implementation of the Treasury's HAMP Program.
In reviewing the Treasury's most recent report, as of the
end of January, GMAC Mortgage, Inc. has reported the highest
percentage of delinquent loans that have been converted to
trial modifications or permanent modifications. At 50 percent,
it's an impressive number. Is there something that you would
like to share with us, as to whether you're doing, employing a
process, or resources that you think we would benefit from
hearing, or that other servicers could----
Mr. Carpenter. Well, thank you for the opportunity to brag
a little bit.
We're very proud of our track record. We actually modified,
in total, 100,000 mortgages since becoming a bank holding
company. We have modified 12,000, permanently modified
mortgages under the HAMP program, which is more than any other
mortgage servicer even though we're not by any means the
largest, and the highest percentage of delinquencies.
And in terms of lessons learned, Mr. Neiman, that like any
new process, it has had its growing pains. And I think the
thing that we did right, from day one, that has allowed us to
be as successful as we've been, is we were very focused on
getting the documentation----
Mr. Neiman. Up front?
Mr. Carpenter [continuing]. From the end customer, up
front. And not relying on verbal commitments and saying, ``Show
us the data and we'll give you the temporary period of time.''
There are other things--if I had my mortgage team here,
they'd give you three or four other ideas. I'd be happy to
correspond with you separately.
Mr. Neiman. Okay, that was very helpful.
Mr. Carpenter. Give you some thoughts.
Mr. Neiman. Okay, picking up on your remarks about lessons
learned, we also have lessons learned in our industry of
financial institutions who have relied on reliable sources of
deposit funding who have had an overemphasis as bank mortgage
companies and unfortunately, some of those lessons involving
WAMU and IndyMac and Golden West turned out not very
successful.
Can you share with us any of your strategies so that--to
the extent that you intend to stay in this business--will not
end up with the same result?
Mr. Carpenter. Well, I would make two observations. The
first one is, if you look at dealer financing, it's a business
we've been in for 90 years. In fact, we've been in the auto
finance business for 90 years, we've only lost money in one
year--2008. If you look at dealer financing--dealer financing
has typically had losses of five to ten basis points. And in
the worst year that we've seen, which is 2008--20 basis points.
So, the losses are extraordinarily low by any standard I'm
aware of.
And secondly, on the automobile side, on the retail side of
the business, I would say--and somewhat, maybe, facetiously--
the last thing a consumer wants to do is give up their
automobile. They'll give up many other things before they give
up their automobile, and so our track record, (a) because of
the importance of the automobile to the customer, and (b)
because we are financing an asset where, in the worst case, we
can repossess it and sell it, our loss experience relative to
other areas of consumer activity--like credit cards--is
extraordinarily favorable.
Mr. Neiman. So, is this dependence--though yes, you've had
a track record of low loss rates with respect to dealer
financing? But how do you assess the interdependence on an auto
industry that is so fragile at this point?
Mr. Carpenter. Well, I think, again, that's a very good
question and I'm not sure I can give you the perfect answer.
But I would say in this situation, obviously the dealer has a
dependency on the manufacturer. And if any one of the
manufacturers has a problem, the dealer has a problem.
We have the benefit of having a loan against an asset, we
know exactly where it is, we know what the VIN number is, and
we have the ability to go in and drive it off the lot. And that
gives us an awful lot of protection, even in the worst of
scenarios.
Mr. Neiman. Thank you.
Mr. Carpenter. Thank you.
Mr. Neiman. My time is expired.
Chair Warren. Thank you.
Mr. McWatters.
Mr. McWatters. Thank you.
Would you please briefly describe how the $17 billion of
taxpayer funds have been used by your company? In other words,
what were the uses of those funds?
Mr. Carpenter. I'm going to have to defer that to Rob,
because I wasn't there through the whole period.
Mr. Hull. Sure, and it's a fair question.
And so the in-flows and out-flows, obviously, are fairly
complex in a $170 billion business, but suffice it to say, when
we do an origination in a quarter, like the $6 billion of auto
or the $18 billion of mortgage--admittedly, we originate
mortgages and then we simply re-sell them when they mature to
the agencies--on the auto side, we may largely sell them into
flow agreements, we may hold some of them in the bank, but
largely we may also securitize those, like we did in two
transactions in the back end of 2009.
So, those funds, in the traunches they came in at, were
used to create capital, so we could borrow, so we could go to
the markets and get more liquidity to give it to that kind of
origination. So, strictly speaking, it has gone to the
originations for autos and mortgages over the course of time.
Again, mortgages will turn very quickly and we'll get that cash
back.
Mr. McWatters. Okay, thank you.
What specific risk management in internal control policies
and procedures have you adopted to ensure that there will not
be the need for another bailout?
Mr. Carpenter. We have significant internal risk controls,
which are in compliance with bank holding company, Fed, FDIC
regulations. They, as you know, examine us constantly for our
adherence on compliance and risk management. We have, at the
board level, a Risk Compliance Committee that meets every month
and which management reports to, we have very significant
policies in terms of risk limits, whether it be on securities,
or whether it be on loans. We have credit policies in place,
all of which are well-defined, all of which are monitored
closely by the management chain, all of which are regularly
audited by our own auditors, all of which is regularly audited
by the Fed and the FDIC examiners. So, we have extremely
comprehensive risk management procedures.
Mr. McWatters. Okay, thank you.
Has GMAC sold any mortgage-backed securities to either the
Fed or to Treasury?
Mr. Hull. Not to my knowledge.
Mr. McWatters. Great.
As a segue to our next panel, Mr. Whalen--I was reading his
remarks--gave Ally Bank an F rating and an overall negative
rating for GMAC. I think it's only fair that you have a chance
to comment.
Mr. Carpenter. I haven't read his remarks, and I have no
idea on what basis he would reach that conclusion. All I can
tell you is Ally Bank is one of the best capitalized banks
around, it has a very successful consumer-driven marketing
strategy that's internet based, and I think is a bright spot.
Mr. McWatters. Okay.
Does your auto finance business earn a rate of return unto
itself sufficient to attract third-party capital? Private
sector capital?
Mr. Carpenter. Yes, it does. It's consistently, as I said,
been profitable, except in 2008. With the right kind of capital
structure, long-term on a return on equity basis or any other
measure you'd like to use, it's an attractive business.
Mr. McWatters. I know this was before your time but why was
there the need for ResCAP?
Mr. Carpenter. That is before my time. General Motors, at
some point, decided to diversify its financial services
activities into the mortgage business and you'd have to ask
them why they did it at the time.
Mr. McWatters. Okay, fair enough.
I'm done.
Chair Warren. Thank you very much.
Thank you, Mr. Carpenter. Thank you, Mr. Hull. We
appreciate your being here, very much.
And I'd like to call the next panel.
Mr. Carpenter. Thank you, Chair Warren and the panel.
Chair Warren. Thank you. Thank you for coming.
Mr. Whalen, Senior Vice President and Managing Director of
Institutional Risk Analytics and Mr. Ward is an analyst with--
is it Soleil?
Mr. Ward. Soleil.
Chair Warren. Soleil, ah.
Mr. Ward. Yes.
Chair Warren. Soleil-Ward Transportation Research.
Thank you both for being here today, I ask you for your
opening remarks, and as I have with earlier witnesses, please
hold them to five minutes. We will put your entire written
statement in the record.
Mr. Whalen, how about if we start with you?
STATEMENT OF CHRISTOPHER WHALEN, SENIOR VICE PRESIDENT AND
MANAGING DIRECTOR, INSTITUTIONAL RISK ANALYTICS
Mr. Whalen. Thank you, Madam Chairman, members of the
panel. I'm going to take advantage of the fact that I get to go
last and make some observations on what I've heard this morning
since you have my written comments.
First, we have the fascinating dichotomy of, on the one
hand, a captive financing vehicle, and on the other hand a bank
holding company. I worked at the Federal Reserve bank in New
York in the bank supervision area, and I'm very familiar with
the criteria for approval under Section 12 and Reg Y for bank
holding companies.
The thing that troubles me is that, in effect, if you want
to look at the big picture, we're essentially using FDIC
deposits as a replacement for commercial paper. That's really
what's going on, here.
And going back to some of the earlier comments about
approval process credit standards for consumer sales of
automobiles, what I think you have to appreciate is that the
captives take the sales that the banks won't--regardless of the
price of the loan. The reality is, when the salesman puts the
customer's Social Security number, the vehicle, the terms of
the lease of the lease of the loan into the computer, it says
yes or no.
So, for example, when I take a lease from Volvo, as I'm
getting ready to do right now, I end up with Ford Motor Credit.
Because neither the Volvo captive nor the banks will take me
since I own my own business. And that is the route that the
salesman ultimately takes with me--it's a more expensive loan
for me and there is, indeed, a much higher risk premium today
then there was a couple of years ago--I hear this constantly
from people in the channel who I speak to.
The second issue goes back to the first panel and choices
in how we did things. To me--and indeed I think this was borne
out by the comments by GMAC management--not cleaning up GMAC
has, indeed, left a millstone around their neck. And while I
hope and expect that the reserve that they've taken for the
repurchase for the defaulted loans is going to be adequate, as
they just testified, I'm not optimistic on that front.
I think both ResCAP and the other originators of private
label securitizations--and remember what we're talking about in
the past is paper that GMAC didn't necessarily sell to Fannie
or Freddie. They oftentimes were going into the pure private
label market. And I think the loss rates there are going to be
quite high. And I would be really surprised if ResCAP did not
continue to be a source of funding need in terms of credit
losses from securitizations going forward for a number of
years.
You won't necessarily see it immediately, because
litigation, the process of foreclosure--all of these things
take a lot of time. But I will tell you that that--that
lingering question, that unliquidated claim is going to prevent
them from offering shares to the public, in my opinion.
I've worked as an investment banker on IPOs as well as
restructurings and I can tell you right now that there is no
way on God's green earth that any rational investor is going to
want to take a flier on what's going on with the mortgage side
of this business at GMAC until they're pretty sure of that that
outcome is going to be.
So, I think that question mark is going to preclude an
initial public offering as an exit strategy until such time as
we absolutely know what's going on with ResCAP.
Finally, let me say, I think that, you know, while I have
great love and admiration for my friends in the Federal Reserve
system, the decision to make GMAC a bank holding company was a
very tortured one. And I am not privy to what they talked about
with Treasury and the other parties, but I can just say,
speaking as a bank analyst who's a principal of a company that
rates every bank in the United States and does so from a
consumer perspective--my ratings are a lot tougher than Moody's
and S&P, because ultimately there's a woman in a bathrobe with
bunny slippers who subscribes to Value Line who came to our
office once who wanted to know where to put $7 million of her
money that was sitting in a credit union.
So, when I give her an A or an F for a given bank, I've got
to be pretty sure that's she's going to be okay, even if she's
above the insured limit.
I think the Fed has created a terrible problem, here.
Because on the one hand, they have to regulate this entity as
though it were, in fact, a bank holding company, but indeed
it's a mono-line that has two-thirds of its liabilities in non-
core funding, funding that could walk out the door tomorrow
because Ally has put in place those terms, the customers can
leave without penalty.
So, I think going forward, the panel should really focus on
what business is this company in, what business is it going to
be in prospectively, and how stable is that business? And I
will be happy to answer questions.
[The prepared statement of Mr. Whalen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Chair Warren. Thank you, Mr. Whalen.
Mr. Ward.
STATEMENT OF MICHAEL WARD, ANALYST, SOLEIL-WARD TRANSPORTATION
RESEARCH
Mr. Ward. Thank you, Chair Warren and members of the panel,
I appreciate being here today and given the opportunity to
speak with you.
My name is Michael Ward, I'm an equity analyst, I have
followed the auto industry for about 30 years, I currently
publish research on Ford, as well as auto suppliers and some of
the dealers.
My comments will be limited to the competitive implications
of an integrated GMAC and General Motors and valuation in the
equity markets or an exit strategy for an integrated GM and
GMAC.
It is my opinion that GM and GMAC will need to be
reintegrated in order to provide the maximum value to current
GM and GMAC stakeholders. My opinion is really based on four
variables.
First, competitive position. I think when you look at an
integrated approach, in our view it is the most efficient tool
to address several variables in the marketplace, specifically
pricing. Most consumers do make purchase decisions based on a
monthly payment. GM is currently at a disadvantage, in my view,
relative to its primary competitors that have captive finance
companies because of the cost--their relative cost--at General
Motors, to subvent a loan.
The second point under that competitive position would be a
marketing tool. Marketing incentives are a big part of the
competitive landscape in the vehicle sales market. A captive
finance company provides the flexibility to offer reduced
rates, as we've heard, as well as lease payments or other
options that are attractive to consumers. Competitive response
falls right in that same category--GM has lost market share in
the U.S. market, its biggest market for the last 10 years. The
market is going to get increasingly competitive over the next
10 years, not less competitive, and GM needs every advantage it
can get.
Its bankruptcy process has slowed some of its new product
development and it's going to be at a significant disadvantage
to both Ford and Toyota, its two principal competitors.
And lastly, which was not talked about much today, is
customer loyalty. In our view, vehicles financed through a
captive sub do not enhance the complete ownership experience.
The second point relative to dealers, an in-house source of
financing for dealers definitely provides a more consistent
auto flow--it wouldn't be at a 90 percent level if that wasn't
the case. One thing that was not mentioned is that most vehicle
manufacturers do provide what they call ``floorplan
assistance''--if a vehicle is sold quickly enough, the dealer
does get, in essence, a kickback, a repayment for some of those
interest costs.
In addition, as you go forward, two big variables that are
going to have to be monitored--the industry, because of the
correction it's had--there is now about a one-third reduction
in dealer inventory. GM alone has taken about 700,000 units out
of dealer inventory, and remember, those are vehicles that were
being financed and paid for, and that's close to $20 billion of
less capital needed in the floorplan loan side of it.
As you go forward, also, dealers are going to have to
invest in their stores. Historically, they have relied on the
vehicle manufacturers or the captive finance subs to provide
some of that financing. As you look into more efficient type
vehicles, electric vehicles and other things it's going to
require some investment.
The third variable that I would look at is the source of
income and financial flexibility. If you look at just GMAC, the
automotive financing portion of GMAC, between 2002 and 2007, it
contributed $8 billion in after-tax earnings to GM. In a highly
cyclical industry like the auto industry, a stable stream of
earnings is very vital as far as when you're looking at
valuations, comparing it to other vehicle manufacturers.
Source of cash--if you look at Ford Motor Credit, as an
example, Ford Motor Credit provides a stream of dividends to
Ford Motor Company. One of the reasons that has helped Ford
survive some of the downturn that we've seen, is they were able
to tap Ford Motor Credit for financing and get rid of some of
their debt, as well as cash to run their auto business. And
then lastly, it does provide a source of financial flexibility
for the vehicle manufacturers as they are able to offset some
of their tax liabilities.
Lastly, on valuation, I think when you look at the vehicle
manufacturers, the two most common metrics people use to value
equities are on an EBIT (Earnings Before Interest and Taxes) to
EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) basis--Enterprise Value to EBITDA multiple--and
on a PE (price/earnings ratio) basis. GM, when you have--if you
have--if you do not have a captive finance subsidiary, they're
going to be at a discount to their peer group, specifically
Ford. Right now, Ford is trading at about five times expected
2011 earning on an EBIT to EBITDA basis, and it's trading at
about eight times expected 2011 earnings on an earnings-per-
share, or a PE basis.
The ownership of Ford Motor Credit definitely contributes--
or will contribute--to Ford's premium multiple relative to GM.
If GM was a publicly traded stock today, I would expect Ford to
command at least a 20 percent premium to General Motors, and
the lack of a captive finance sub would probably account for
about half of that.
Thank you very much and I'd be happy to try to answer any
questions.
Chair Warren. Thank you, Mr. Ward. Thank you, Mr. Whalen.
I'm trying to thread through a story about why it is that
GMAC got the kind of rescue that it got. And at least one of
the stories that Treasury tells around this is that they made
the decision to invest in the auto industry, this started
during the Bush Administration, and was carried on, then,
during the Obama Administration, in large part because of jobs
and other systemic implications. And we've written about that
in the past, we very well may write about it again in the
future. But that's, at least, a version of what's happening.
So, GMAC, the story goes, is essential because with GMAC
you can't save Chrysler and GM. Indeed, I think you probably
heard Mr. Bloom sit here and say, ``We couldn't even take the
risk of running GMAC through bankruptcy, because GMAC was
absolutely essential to the survival of GM and Chrysler, and
without it, they would have failed.''
Now, so I just want to press on that part of the thread,
particularly because you've addressed it partly in your written
remarks and because it's part of the story, here. In Panel
discussions with the former GMAC CEO Al de Molina, he said,
``No one, either by itself, or together, could have done it.''
And here, what he's talking about is replacing GMAC's floorplan
financing of GM dealers, at the time. There was a concentration
of risk that no one would take on, I don't know anyone who
opposes that view.
And, in fact, as you heard, what GMAC did is it continued
to finance the dealerships, even when it meant they wouldn't
finance sales. In fact, as I understand it, during the crisis,
GM auto dealership financing went up to 85 percent, was through
GMAC.
So, that's really the question--how important was GMAC
financing to the survival of GM and ultimately to Chrysler? But
it's GM that we're really talking about here.
Mr. Whalen.
Mr. Whalen. Well, for the reasons already stated, obviously
it's important. But I think it's also important to realize that
the spin-off of GMAC from GM was done for entirely different
reasons. Which was, to get the mortgage business which, at the
time, was seen as attractive, away from the dying auto business
at GM.
So, you know, and my colleague Mr. Ward has addressed this.
Now we have a situation where the mortgage business is killing
the former captive, and we have constructed yet a new rationale
for bailing it out.
As I said in my statement, I think there's two drivers
here. One is the political relationship between the Democratic
Party and the United Auto Workers----
Chair Warren. So, let me--to start though, this started
during the Bush Administration, this didn't start during the
Obama Administration.
Mr. Whalen. No, that's true. But the United Auto Workers
have friends in many places. And even though, in economic
terms, it would probably be beneficial to the industry as a
whole to get rid of at least one competitor in North America,
the political class does not want to do this. And this is a
global problem, it's not just in the U.S. that you see this.
Chair Warren. So, if you'll permit me, though, I do want to
focus in, I just want to make sure we're all on the same page,
here. Without GMAC, GM was unlikely to survive? At the moment
when we funded it? Good arguments about why it never should
have been spun off to begin with, but I just want to make sure
we're on the same place on this.
Mr. Whalen. I think that's a fair statement.
Chair Warren. Fair statement.
Mr. Ward.
Mr. Ward. I think one of the things that needs to be
pointed out is, every unit produced is to a dealer order. GM
records revenue when a car is shipped to a dealer or
production. The dealers are the customer for General Motors.
They have no financing.
Chair Warren. I have come to learn that.
Mr. Ward. It's gone. I mean, if they didn't rescue GMAC--if
GMAC did not exist, GM would have been Chapter 7.
Chair Warren. Okay.
Mr. Ward. They would have disappeared.
Chair Warren. All right.
Now, let me see if I can just--I just want to understand
the rest of the pieces of the financing. You've raised the
question, Mr. Whalen, about if GM had failed, what other--
actually, let me ask about securitizations, since I've got
limited time, let me just go to the securitization question.
You raised the point in your testimony there was no
compelling financial or business reason to rescue GMAC, there
were private alternatives available to GM and Chrysler in the
marketplace for floor plan lending, and the securitization of
auto loans was never really in doubt.
In fact, however, it seems that auto securitizations
collapsed from $21 billion from the second quarter of 2008 to
less than $3 billion in the second half of 2008. That doesn't
seem to be an immediate recovery. So, I don't think I'm quite
understanding your point, here, and I just want to make sure I
get it on the role of securitization.
Mr. Whalen. Well, let me put it to you this way. Unlike all
of the other asset classes in the securitization world,
particularly mortgage securitizations, auto paper--because it
is very short in maturity, very simple deals, and also because
it does have a very significant following among institutional
investors, basically fixed itself, and Ford is the example.
Chair Warren. Well, but wait a minute----
Mr. Whalen. Now, sales dropped off.
Chair Warren [continuing]. Going from $21 billion to $3
billion doesn't look like it fixed itself and that it only
started coming back once TALF was in place, a TARP program.
Mr. Whalen. Yes. But if you look at it today, especially if
you focus on--well, let me put it to you this way. Part of the
attraction for investors is obviously the collateral behind the
financing. But the real practical attraction is the ability of
the issuer to perform on the reps and warranties made in the
securities offering. That is to say, the ability to buy back
bad loans, or substitute bad loans.
So, obviously, when GMAC got into trouble, Wall Street
shrank back, they wanted no part of it. The banks ran from this
market, too, as I'm sure Mr. Ward would confirm--they wanted no
part of it.
So, what was left were the viable auto finance companies
that were willing to continue doing business at the low levels
of sales that we saw during that period.
So, I haven't gone through those numbers that you're
referring to in detail, and I don't quibble with your
characterization, but what I am saying is this is an example of
an asset class that is successful, as opposed to private label
mortgage securitizations which, I don't know if they will ever
come back.
Chair Warren. But it did have a substantial period where
they were in real trouble.
Mr. Whalen. Yes, it did.
Chair Warren. Okay.
Mr. Atkins.
Mr. Atkins. Thank you. So, let me just pick up on that.
We've heard that GMAC is going to try to reinvent itself,
change its name and perhaps appeal to other parties, obviously
they need to make the Chrysler guys feel like they're welcome
under a former GMAC label. So, now GMAC has government backing
and it also has Ally Bank as a thing to support its activities
in this market.
So, is GMAC getting to be more like a GSE in its current
form? You know, like Fannie Mae, Freddie Mac, with this
implicit government backing? Is that arguable? Is it getting
better types of financing possibilities in the marketplace
because of this backing? Or, what's the effect on competitors?
Mr. Whalen. I think, obviously, both GM, Chrysler, and GMAC
today are government-sponsored entities, by definition.
However, because of the unresolved issues at GMAC, obviously
their spreads have not improved to the point where they're
comparable to the other GSEs. If they were, and if the
marketplace didn't have any fear that a restructuring might
still take place, then I think the spreads would be narrower.
In fact, going back to the last conference call where GMAC
management discussed strategic alternatives, and going back to
one of your earlier questions, analysts are still asking them
if there's not, in fact, a potential bankruptcy for ResCAP.
The problem we have, though, is that now that we are a bank
holding company--and by we, I'm talking about GMAC--you can't
do that. Because when the affiliate of a bank holding company
defaults, the whole group defaults. And that's the cul-de-sac
that we, meaning Treasury and the Fed, have, essentially,
driven into now.
So, the decision to make this finance company a bank
holding company has actually limited the Treasury's
flexibility, and therefore they come back to us and say, ``Oh
me, oh my, we didn't have any choice.''
Mr. Atkins. Thank you.
Mr. Ward. I'm not as familiar with that side of the market.
The one thing I can point to is that, as you look at the auto
industry, as far as the retail consumer, and the fact that it
is perceived that GM is backed by the government or owned by
the government--it has hurt General Motors in the marketplace
and Chrysler in the marketplace. And to the extent that GMAC is
considered to be backed along those lines, they will lose
interest from dealers. Because a big part of owning a franchise
is what else is behind it, including the dealer financing and
other variables.
Mr. Atkins. And, Mr. Whalen, you've made a point, too, that
internet banking has yet to really prove its mettle in the
marketplace and I was wondering what your view is with respect
to Ally Bank as being a key part of this package of
revitalization?
Mr. Whalen. Well, as management has articulated their
vision for the future, they seem to be focused on a broad
consumer banking franchise--not just auto sales--because I,
personally, don't think a mono-line is viable, as a bank
holding company. I think you have to make mortgage loans, you
have to make other types of loans.
But the trouble comes, and I can point you to a number of
peers in the FDIC universe, that when you don't have brick and
mortar branches, you have to go out and acquire and retain
customers using advertising of various types, which can be
quite expensive. And the example I used in my testimony was ING
Direct, which is a reasonably well-run bank, but they bid up
for deposits, because the home office wanted them to be big.
In this case, we have a bank holding company that has to
bid up for deposits because it's a functional replacement for
commercial paper.
So, we're again stuck in the very difficult business model,
a business model comprised of choices where we don't have
funding flexibility yet--hopefully that will come--and yet
we're still being driven to finance sales as though we were a
captive. And that, I think, is an issue that is really
insoluble at the end of the day.
I couldn't--let me put it to you this way--I have friends
in the banking business who say it's possible to have a
profitable internet bank, but I don't have one to show you
right now.
Mr. Atkins. Well, okay.
I'll pass the--I just have a few more seconds.
Chair Warren. All right.
Superintendent Neiman.
Mr. Neiman. I'd like to follow-up with you on this issue of
strategic plans going forward, and your very interesting
comment that a mono-line bank is not a viable business model.
Recognizing your comments about the business of ResCAP,
what are your views as to whether GMAC should divest itself of
those non-core businesses? Would it strengthen the institution,
or would it just increase the risks to the taxpayers by
increasing the interdependency and concentration of its
affiliation with GM?
Mr. Whalen. Well, if you were to sell it, if you could, I
think it would end up costing you money. In other words, you
would give the entity to someone else, but you would have to
make reps and warranties regarding any future claims that would
be fairly onerous. I certainly wouldn't buy the company in its
current state. Even if they write down the on-balance sheet
mortgage exposures to zero, you still have the legacy off-
balance sheet securitization exposures which the management
team alluded to and if you take a reasonable fraction of that
20, 25 percent default rate as being potentially kicked back to
them in terms of demands for repurchase, that's going to be a
pretty good size number.
The other thing I would comment on that, it just occurred
to me because of your question, is this whole issue of
modification--modification is not a panacea. The re-default
rate on modifications is quite high. And I look at modification
with respect to all of the banks that I cover right now as
essentially a place to hide losses. As soon as a bank says,
``Oh, well, this loan is being modified,'' they don't report
losses on it anymore. And there is a backlog of losses in the
banking industry that's probably as much as a third to forty
percent of the current charge-off rate that you can see
reported in the FDIC's Quarterly Banking Profile that just came
out this week.
So, as you go forward, keep in the back of your minds that
there are a lot of hidden liabilities in this company. And
management's trying to deal with them in good order, They have
indicated they have a reserve established, but that reserve may
be woefully inadequate if we don't see a really strong uptick
in real estate prices in this country.
Mr. Neiman. So, you would expect to see and possibly
support a continuation of that non-core business in the
mortgage business?
Mr. Whalen. It looks like that's what they're doing.
They're originating what we call conforming paper that they can
sell to Fannie and Freddie, which is not an unreasonable
process. But if those loans go bad, as you've seen in the
newspaper recently with respect to the Federal Home Loan Banks,
they will come back and ask the issuer to substitute or
repurchase the defaulted loan, and that can get to be quite
expensive.
Mr. Neiman. But, in terms of a business model going
forward, and growing that business, is that where their focus
should be to be a viable institution? Or expanding into other
consumer and finance business lines?
Mr. Whalen. Well, going back to Mr. Ward's comment, I don't
think a mono-line auto business is viable as a stand-alone, and
I certainly don't think it would make a very attractive IPO.
Remember, the earlier witness alluded to the credit card
mono-lines--they've all been bought.
Mr. Neiman. Right.
Mr. Whalen. The only one left is Capital One and they
backed into a couple of retail regional banks so that they
wouldn't get bought, essentially. It's a company I cover, and I
like very much, but they had to diversify, as well. Just being
a credit card company was not sufficient.
Mr. Neiman. Mr. Ward, you made reference to--I think it was
picking up on some of the question I asked to the Treasury
panel, as to whether they were exploring a combining of GM and
GMAC, integrating GMAC back into GM. You seem very supportive
of that approach?
Mr. Ward. I think it's the only way to get full value back
to us, to the taxpayers. General Motors is going to come at a
substantial discount to Ford, and if you just put numbers down
on paper on a EBIT to EBITDA basis, three times EBIT to EBITDA
doesn't get you a heck of a lot. Or, you know, six to eight
times on a PE basis--it would take decades for the Treasury to
get some of their investment back by selling out the stock. If
you enhance it by putting the captive sub back into it, it does
stand on much better footing relative to both Ford and Toyota,
their two principal competitors.
There was a question earlier, when somebody asked, why did
they get into the ResCAP business and other things.
Mr. Neiman. Right.
Mr. Ward. Throughout the 1990s, it was the goal of the
vehicle manufacturers, when they were flush with cash--and it
wasn't just General Motors--to diversify their financial
services operations. It was one of the few areas that was large
enough to make an impact on the automotive business because of
the size and scope. And so they did make a lot of investments.
Ford had several, but they divested of them. GM just held on
too long.
Mr. Neiman. What are your assessments of what the strategic
plan will look like when it comes out of GMAC?
Mr. Ward. I'm hopeful, as an auto analyst, that GMAC is
reintegrated with General Motors.
Mr. Neiman. Okay, thank you.
Chair Warren. Very interesting, thank you.
Mr. McWatters.
Mr. McWatters. Thank you.
Mr. Whalen, your current rating for Ally Bank is an F and
GMAC is negative. Would you comment on that, and also comment
on what these institutions need to do to change an F to a B or
maybe a C? And a negative to something less than negative? And
Mr. Ward, if you could comment on his thoughts?
Mr. Whalen. Well, the F rating for Ally Bank is driven
primarily from the losses they've been reporting on the income
line. In other words, provisions for future credit losses. You
take income, you put it in a reserve account, therefore the
bank is losing money.
We included the history of their ratings going back a few
years at the back of my testimony, and you can see, when the
bank started reporting losses, they went from a C in one
quarter, to an F.
We have, as I mentioned before, a fairly draconian letter
rating system for banks, because we have 25,000 retail
customers who use our ratings as an asset allocation tool. And
there are banks--we currently rank about 4,000 banks F out of
8,100 or so FDIC-Insured institutions. Half of those have many
factors that drove them to that, most of them, about half, are
just return on equity stories. In other words, for half of the
banks we currently rate F, it's provision for credit losses
that is driving the rating.
Now, you'll notice that the score for Ally is also very
high because of their restructuring in the fourth quarter. They
don't have a horrible charge-off rate on a normalized basis if
you go back a few quarters, but they really took a bath in the
fourth quarter. Ally Bank wrote down a lot of assets, moved
them to ResCAP, because they want to isolate the bank from the
bad things that are going on at ResCAP.
In general, I want to see an end to operating losses. And
I'm going to keep a negative outlook on the company as a whole
until I'm sure of what's going on in ResCAP. Because at the end
of the day, all of the good work that I know that these people
are doing to turn their company around is for naught, if we
still have a functional equivalent of Chernobyl in ResCAP
bubbling way off in the corner. And that's what ResCAP is. You
can't sell these businesses, you can't do much of anything with
them except put them into bankruptcy.
And that's why I alluded to the difference between
Washington Mutual and Bear Stearns with respect to JP Morgan.
Study those two cases. In the case of Washington Mutual, all of
the unliquidated claims are sitting in bankruptcy court, there
is no litigation regarding those securitizations.
On the other hand, with Bear Stearns, because it wasn't
restructured, you are going to see a long period of JP Morgan
dealing with that pain.
Mr. Ward. I'm not really familiar with the banks and how
they rate themselves, but he seems like he's got a pretty
disciplined strategy, with his ratings, so I'm siding with him.
[Laughter.]
Mr. McWatters. Okay. Fair enough, fair enough.
Mr. Whalen, on page 10 of your paper, you state that
converting GMAC into a bank holding company was a bad public
policy choice and an equally bad financial decision, why is
that?
Mr. Whalen. Well, you took a company that was insolvent and
you pushed through the regulatory process at the Fed,
disregarding, in my opinion, the capital and managerial
criteria in Reg Y and the Bank Holding Company Act, and then
after the fact, Treasury put capital into an unrestructured
entity and tried, essentially, to buy time. I would
characterize all of the TARP investments, to date, as buying
time.
But, you know, we have a saying in the analytics business,
``When you're in a hole, stop digging.'' And, I think
ultimately, even today it would be beneficial to General
Motors, if that's our real objective, turning that company
around, if the Fed and the Treasury would put their heads
together, put GMAC into bankruptcy and do it on an expedited
basis, and then as Mr. Ward said, let GM buy it. I think that
would be a happy ending. You could get the acquiescence of the
FDIC not to seize the bank, and we would all live happily ever
after.
Mr. McWatters. Thank you.
On page 15 of your paper, you talk about the putback rights
with respect to defaulted subprime loans. I asked the question
to management, there doesn't seem to be a lot of concern here,
it seems to be that they've reserved for it and it's not as
much of a problem. But, I gather you think it may be because
you've underlined it in your paper?
Mr. Whalen. Well, when you're dealing with public
disclosure of public companies--and GMAC still does have
disclosure responsibilities under the Securities Act of 1934--
you always tell investors everything you have to tell them this
quarter. And I deal with this with all of the banks I cover.
They tell you just enough. And they're not doing this because
they're evil or duplicitous, they're doing this because there's
a fine balance between public disclosure and your duty to the
corporation. Boards of directors, by the way, don't have a duty
to shareholders, they have a duty to the corporation. And so
they try and balance the two, priorities of disclosure and
investor relations.
And I'm sure based on what they know today, they think that
reserve is adequate, but I would tell you, I think they're
going to need more.
Mr. McWatters. Okay, thank you.
Chair Warren. Okay, good.
We're just going to ask a couple of very quick questions, I
think try to move this through as quickly as we can. I just
want to make sure I'm following this.
What I'm hearing is that your first option is, sell off the
non-auto assets--for whatever it's going to take to sell them
off--and then collapse GMAC back into GM. That would be option
one. Option two is take it through bankruptcy and, in effect,
try to accomplish the same end, to get the auto finance part
back into GM. Not only because GMAC doesn't make any sense, but
as a way to strengthen GM and get the non-auto part back out
into wherever you can it, to whomever you can sell it to. Is
that the view of both of you, here? Mr. Ward.
Mr. Ward. It's certainly my perspective. I'm not sure what
happens with the other aspects of GMAC, but as it relates to
the auto business, yes. I think the proper home would be
within--to have GM and GMAC integrated.
Chair Warren. All right, and at the risk of stating the
obvious, just because I want to be sure I'm clear on this, you
believe that's the best thing we could do for GM before trying
to save GM?
Mr. Ward. Yes, in two respects--from a competitive
standpoint, as they compete with Ford and Toyota specifically--
and then secondly, as a valuation. At some point, they've got
to come back to the capital markets and the discount will be
greater if GMAC is not part of General Motors.
Chair Warren. Right. And I'm going to presume, Mr. Whalen,
that you would add to those two points, it also takes away from
the risk associated right now with ResCAP, if it can be done,
either through bankruptcy or through a sale, where someone else
picks up that----
Mr. Whalen. That's the rub----
Chair Warren [continuing]. That unhappy----
Mr. Whalen [continuing]. Speaking as an investment banker,
if I were representing GM, I would not let them buy it back
unless I had an ironclad understanding with respect to the
other liabilities.
And it raises the point again--but let me say this, too,
Madam Chair. I've always believed that people misunderstood
TARP. We should not be dancing in the street because banks have
repaid their TARP funds. If it had been up to me, I would have
told the banks, all of them including GMAC, ``Take the TARP
money, charge it off. Take your worst loans, charge it off,
don't give me the money back.'' Because if the point is
reviving the U.S. economy and reviving lending, which is
shrinking at an 8, 10 percent annual rate right now if you look
at the latest FDIC data, then we haven't achieved anything. We
should have told every one of these institutions, ``Just charge
it off.'' Because the benefit to the economy, we would have
gotten enormous leverage from that.
And instead, we're sitting here, counting these pennies
while our financial system is still shrinking. So, you know,
that's my perspective on it.
Chair Warren. Okay.
Thank you, Mr. Whalen. Thank you, Mr. Ward.
Mr. Atkins.
Mr. Atkins. Okay, thank you. I have just a couple of
questions. One, I tried to explore in the earlier panel about
the coming financing crunch that GMAC's going to be having.
They have--over the next three years--about $60 billion of debt
that's going to be coming due and they just did a 144A offering
for $2 billion at 8.3 percent for five-year notes.
And so my question for you is what's the appetite in the
industry considering--or in the markets--considering all of the
things that the company's done to try to fix this balance sheet
for that sort of capital, and what do you view as the
likelihood of more TARP funds being thrown at the firm?
Mr. Whalen. Well, as I said before, as a freestanding
entity, I don't know that I would be a buyer of that paper. The
spreads would have to be quite high; it would be junk
financing----
Mr. Atkins. Does 8.3 percent account for that, or not?
Mr. Whalen. I don't know, I would defer to Mr. Ward on that
in terms of industry financing spreads but remember, if you're
an investor and you're staring at ResCAP because you're buying
debt from the parent, life has got a big question mark on it.
Mr. Ward. Those financing rates sound right. I think the--
from the automotive perspective, historically the automotive
paper has been good paper.
One of the things that did happen, I think the two biggest
players in that market were Bear Stearns and Lehman, and not
only did you have the disruption in the market, but the two
biggest players in that market--the securitization market--
disappeared, essentially.
So, you are starting to see some life in the securitization
market, freestanding, away from TALF. And so I think as the
cycle returns, particularly in North America, and profitability
starts to come back for the industry, I think the worst is
over, I would expect the appetite to improve.
Mr. Atkins. Okay, and of course TALF ends next month----
Mr. Ward. That's right.
Mr. Atkins. Unless the Fed extends it.
And then one last question--we spoke with earlier panels
about how easy or difficult it is for competitors to come in,
of course, as Professor Warren was asking, that was one of the
rationales, of course, to bail out GMAC. What is your view with
respect to the ability of other companies to pick up in here?
Is it, in fact, a very siloed type of thing, or are there
structural problems to this market?
Mr. Whalen. Well, as has already been alluded to,
manufacturers typically provide financing for their sales. And
this is common for most industries, and that's how you should
look at this. When a bank comes in to provide financing for
auto dealers--and this was heard from management, it was over
half, someone was providing financing for those other sales--
they're picking off the better customers, by definition.
They're not there to get the worst customers.
So, the captive is financing the rest, and that's how they
get the volumes. And they take that risk, but having said all
of that, auto paper is still a very good risk. I agree with
what the CEO of GMAC had to say about that.
Chair Warren. Good.
Thank you, Mr. Whalen, I appreciate that.
Superintendent Neiman.
Mr. Neiman. So, I just want to clarify, you know, really
understand your assessment of the risks of remaining a--not
only a mono-line, but one interdependent with GM. And how
critical a risk is that if this institution remains with that
level of interdependence?
Mr. Whalen. Well, I think it's the only way these
businesses work, is as captives. You know, this is basically a
bank holding company looking for a business model right now.
And I'm very sympathetic to the people involved, I know they're
doing their best, but the truth of the matter is when the
private equity boys took this company out of GM, they were
engaged in a little bit of arbitrage, and now we are paying the
price for that.
I think the only rational decision, if you really want to
help GM, is to put this thing through a restructuring, sell the
auto business back to them and leave the rest of it in
bankruptcy court for the Trustee to deal with.
You know, everybody always screams and yells about Lehman
Brothers, but in fact, Harvey Miller and the good people in the
Southern District of New York did a brilliant job on that
bankruptcy. It's a case study in how you deal with a complex
financial institution. And I think we ought to take their
example. The only thing we lack is courage.
Mr. Neiman. We asked Treasury, is it possible, are there
any plans to encourage other competitors in this market--we
hear the reasons as to why other banks are not in this
business--because of expertise, and systems and knowledge
base--is that the reason they're not in this business?
Mr. Whalen. Well, they've had hard lessons. GE, throughout
the 1980s, basically provided financing for Chrysler. They got
stung hard on leasing and some of the other losses, so I think,
you know, the banks are certainly aware of the size of the
market and the appetite, but I think the ease of the flow going
from the dealer order, financing the product, going through the
customers--it's just one integrated package. You don't have to
go out to market to sell it. It comes with the business, it's a
revenue engine, and it continues.
And so, I think they're well aware of what the market is
like out there, they just have decided to stay away. They can't
compete, they haven't been offered the subvention that the
captive financing companies get, and so as a result, they can't
compete with them.
Mr. Neiman. Thank you.
Chair Warren. Mr. McWatters?
Mr. McWatters. I'm done.
Chair Warren. All right, good.
I just wanted to say thank you, Mr. Ward and thank you, Mr.
Whalen, and express a little bit of frustration. We had asked
Treasury to stay so that we might ask some questions at the
conclusion of your testimony. They elected not to, and I'm
sorry for that. I would like to have had them make some remarks
in this context.
But I can assure you we will ask the questions based on
your testimony as we go forward in our conversations with
Treasury and with GMAC.
Thank you very much for being here today.
Mr. Whalen. Thank you very much.
Chair Warren. Thank you.
The record will be held open for additional questions.
Thank you all. And this hearing is adjourned.
[Whereupon, at 12:46 p.m., the panel was adjourned.]