Stress Test Finds GMAC Needs Even More Cash

For Cerberus Capital Management, the U.S. government may end up being the ultimate backseat driver.

On the heels of Chrysler LLC’s swerve into bankruptcy, a move that followed a lengthy back-and-forth with the government about the best course to take, GMAC LLC, another auto-related portfolio company backed by Cerberus Capital, is also dealing with significant government scrutiny. And the end result may be yet another handout from Uncle Sam.

Founded in 1919, GMAC, the former finance arm of General Motors turned bank holding company, was found by the recent stress tests conducted by the Federal Reserve to be undercapitalized to the tune of $11.5 billion. Though that deficit is more than half the size of GMAC’s $22.0 billion of total equity as of March 31, the company now needs to raise that money before the year is out.

The task of raising the funds, of which at least $9.1 billion must be new Tier 1 capital, means Cerberus Capital could see its already shrunken stake in the auto and mortgage lender reduced even further.

Acquired by a Cerberus Capital-led group in 2006, GMAC became a bank holding company in December 2008 in order to be eligible for government bailout funding. Today the company is among the 19 largest depository institutions in the United States.

Given the size of GMAC and its 18 peers—and their overall importance when it comes to investor confidence—the government saw fit to submit the largest bank holding companies in the nation to a stress test, officially dubbed the Supervisory Capital Assessment Program, in order to estimate of how much of an additional capital buffer, if any, each institution would need in order to weather a worsened economic storm over the next two years.

Only two other entities evaluated in the stress test had deeper holes to fill than GMAC: Bank of America, found to have a $33.9 billion shortfall, and Wells Fargo, which needs an additional $13.7 billion.

Though BofA and Wells Fargo both need to raise more capital than GMAC, the pair may have an easier time of it given the name recognition they’ve built up as long-standing commercial players complete with brick-and-mortar branch locations. Detroit-based GMAC Bank, on the other hand, is an online depository institution that’s only existed as a bank for roughly six months.

On May 15, GMAC Bank announced it would change its name to Ally Bank and launch a series of new investment products as it attempts to draw in more deposits to shore up its shortfalls.

The interest in the longevity of GMAC—the only stress-tested bank with significant LBO backing—was heightened when the government tapped the lender last month to be the preferred provider of new wholesale financing for Chrysler dealer inventory.

GMAC, which managed about $180 billion in assets as of March 31, is required to provide the Federal Reserve Bank of Chicago with a plan to meet the capital requirements by June 8.

New York-based Cerberus Capital had to whittle down its own equity stake in GMAC to no greater than 33 percent in order for the company to meet bank holding company standards, so it isn’t in a position to offer any more of its own money to the company. When the buyout shop and hedge fund manager first acquired GMAC, it and co-investors Aozora Bank and Citigroup controlled 51 percent of the financial services company, while General Motors held the remainder.

Ratings agency Standard & Poor’s, which maintained its negative outlook and ‘CCC’ rating on GMAC following the stress test results, said it is doubtful that GMAC will be able to raise the money via the public markets. S&P expects the company will have to seek government funding to meet the capital requirement.

“Although it remains to be seen what form or how much financing the government would provide, we believe that GMAC will have to use the government to fill its capital shortfall,” S&P said in a statement released May 8.

If the government ends up bankrolling GMAC’s $11.5 billion capital cushion, it will be the latest of several multi-billion dollar tranches it’s already committed to the company. In December 2008, GMAC received $5 billion in government funding via the Treasury Department’s Troubled Asset Relief Program, or TARP. Meantime, the government has also indicated that it intends to further support GMAC by providing the capital required to support the company’s April 30 financing deal with Chrysler dealers and customers.