Wednesday, March 14, 2007

GM Injects $1 Billion Into GMAC Because of Subprime Mortgages

From Reuters:

General Motors Corp. (NYSE:GM - News) will inject $1 billion into GMAC, its former finance arm said on Tuesday, a capital infusion needed to complete the sale of the automaker's majority stake in the face of escalating defaults in the U.S. mortgage market.

GMAC, which reported results on Tuesday, said that even after the equity injection from GM, "continuing pressures in the U.S. mortgage sector" would weigh on its future earnings.

Under terms of its sale to a group led by Cerberus Capital Management, GM had guaranteed a minimum book value of $14.4 billion when the sale closed at the end of November.

However, a recalculation of GMAC's book value revealed a shortfall caused by the mortgage losses that GM is now trying to address with the $1 billion cash injection this quarter.

Let's look at this in more detail, because it raises some possibly scary issues.

GM sold GMAC. Part of the terms of the agreement said GMAC would be worth a minimum of $14.4 billion. After looking at the books again the curreny book value was obviously below the stated minimum value. To correct the problem, GM injected $1 billion dollars into GMAC.

Think about what that might mean. Does GMAC have $1 billion in losses or possible losses as the result of mortgage issues?