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GM profit in '07 likely to be hit by home-loan woes

The carmaker must contribute $1 billion to bolster lending affiliate GMAC under terms of a majority-stake sale.

March 15, 2007|John O'Dell | Times Staff Writer

General Motors Corp. expects home loan defaults to drag down its financial results this year.

One of GM's major assets is its 49% interest in GMAC Financial Services. A wholly owned subsidiary until last November, GMAC is a major provider of sub-prime loans to borrowers with poor credit.

In a long-delayed fourth-quarter financial report Wednesday, GM said that GMAC's home mortgage unit lost $651 million in the quarter because of soured loans. The automaker said it would have to contribute $1 billion cash to GMAC in the first quarter to boost the unit's book value under terms of its sale of majority interest last year.

"It's ironic that GMAC, not long ago the jewel in GM's crown, is now tarnished," said Shelly Lombard, a credit analyst at Gimme Credit corporate research in New York.

In the fourth quarter, GM's profit was $950 million.

GM stock fell 26 cents to $30.25.

Analysts were disappointed with the fourth-quarter performance and said they were concerned about the effect of the mortgage-loan crunch. But whatever happens with GMAC, "it's on its car business that it will live or die," Lombard said. She noted that the company had introduced its line of redesigned full-size pickup trucks toward the end of 2006 and still saw revenue for the final quarter slip.

Although the results showed that a year of turnaround measures was beginning to pay off, Lombard and others cautioned that GM still had a number of obstacles to overcome. Chief among them is negotiation of a new contract with the United Auto Workers union; the current three-year pact expires in September.

GM, along with Ford Motor Co. and the Chrysler Group of Germany's DaimlerChrysler, needs to wring concessions from the union on expensive job protection and workplace rules.

The Detroit-based automaker said revenue in the fourth quarter dropped 1% to $51.2 billion from $51.7 billion

Net earnings, equal to $1.68 a share, compared favorably with a 2005 fourth-quarter loss of $6.6 billion, or $11.63 a share. GM's net loss for the full year narrowed to $2 billion -- down from a loss of $10.4 billion in 2005.

By comparison, Ford posted a loss of $12.7 billion for 2006, the worst in its history, and Chrysler lost almost $1.5 billion.

Still, GM's automotive results remain "anemic at what we still believe is the peak of the company's product, pricing and cost reduction cycle," Banc of America Securities analyst Ron Tadross wrote in a note to investors.

Chief Financial Officer Fritz Henderson said GM cut operating costs by $6.8 billion in 2006 and was on track to boost that to $9 billion this year.

The savings came from massive spending cuts and an early retirement and employee buyout program that trimmed almost 35,000 jobs from GM's hourly payroll in the U.S. and Canada.

GM's financial report, originally due in January, was delayed by more than a month as the automaker reworked financial statements going back to the beginning of 2002 and dealt with difficulties in preparing GMAC's balance sheet as its residential mortgage loan losses grew.

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