Citigroup, General Motors, Cerberus, JP Morgan Chase... what do they all have in common? GMAC, the lending arm of GM that's suffering from the combination of a credit crisis and spiraling home values. GMAC has come home looking for fresh cash injections twice already this year and nothing seems to help its solvency and, consequently, the faith of the markets in its long-term viability.
The yields on GMAC bonds are currently at about 19%; with the U.S. Treasury rate in the low single-digits, that speaks volumes about the risk investors associate with a stake in the firm. With 27,000 employees and $250 billion in assets, GMAC dwarfs Bear Stearns and that's even bigger than the largest mortgage lender, Countrywide Financial Corp. For the most part, however, we've heard relatively little about the firm or its troubles. With JP Morgan predicting a 100% chance of default on its bonds within the next 5-years, you really do have to have a strong will to invest your nest egg with the management at GMAC. More importantly, however, what sorts of risks does this represent for the financial markets if the Fed was concerned enough to step-in to support JP Morgan's buyout of Bear Stearns?
GM and Cerberus have been doing everything within their power to support the lender, but at some point you have to begin to question when it becomes throwing good money after bad. Then the question becomes what is the potential hazard for the broader economy. Mr. Bernanke and the Fed made it clear that the financial markets could not withstand the collapse of an institution as large as Bear Stearns; what does that suggest about the degrading status of GMAC?
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