There are many contenders for the most disastrous enterprise in the financial crisis: Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch, AIG etc. For my money (literally, since I am a US taxpayer) it is hard to beat General Motors.
GM is still in intensive care, relentlessly absorbing public money with no obvious end in sight. Banks may be starting to look a bit healthier, but GM keeps on getting sicker.
This week, we learned that GM, which has so far taken $15.4bn of public money, will need $9bn more this year. It is bleeding cash at an accelerating rate, could enter Chapter 11 bankruptcy, and has amassed losses of $88bn since 2004.
Then came this evening’s stress tests on US banks, which found that GMAC, its financing arm, needs an additional $11.5bn in capital to remain adequately financed in the next couple of years. It is not at all obvious where this will come from, apart from the public purse.
GMAC has common equity of $11.1bn at the moment so, relative to its size, the hole in its balance sheet is the biggest of the 19 financial institutions subjected to stress tests.
The worst thing about GMAC is that, while large banks such as Bank of America can partially earn their way out of the hole they are in, it is stuck. The stress test estimates that, while Bank of America could pump out $74bn in net revenue in the next couple of years, GMAC will lose a further $500m.
GMAC’s problems are tied to those of GM, since it used its finance arm, formed in 1919, to provide cheap finance to consumers who would not otherwise have bought its cars.
Indeed, the GM/GMAC malaise did not just damage the US economy – it extended to other countries where GM operated. Here is what Bernstein Research had to say on its influence in a recent report on the European market:
GM has been a deflationary force on pricing – both in the US and Europe – for many years. Having historically refused to reduce manufacturing capacity, product offering and dealer density, GM has always resorted to aggressive pricing. GM has been the leading exponent of over-supply, cheap financing and deflationary strategies . . . GM has been selling hundreds of thousands of “brand new second-hand cars” each year – vehicles for which there is no real consumer demand but that go quickly to second-hand via daily rental fleets, employee discounts and other routes.
We now know that this not only pushed GM towards insolvency but has brought low its finance arm as well. Both are heavily dependent on the largesse of the US government.
Yes, as financial disasters go, that is hard to beat.
Update: Felix Salmon suggests that GMAC’s bondholders could end up owning it and “good luck with that”. Indeed.
