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Bailing out GMAC

Its health is key to helping U.S. automakers rebound.

November 10, 2009

A year after the Big Three implored Congress to save their industry from collapse, the fortunes of U.S. automakers are looking up. Ford, which lobbied for the bailout but took no aid directly, recently reported its second consecutive quarterly profit. General Motors, which emerged from bankruptcy with the U.S. government as its biggest stakeholder, announced even better sales in October than Ford. It's harder to find good news out of Chrysler, which has received $13.8 billion in federal aid. But at least its new leadership announced plans this month to break even by 2011 and pay taxpayers back by 2014.

Nevertheless, on Monday the Federal Reserve issued a sobering announcement that GMAC -- the former financial services arm of GM turned bank holding company -- still needs to shore up its balance sheet. Its problem isn't the loans it provides to GM and Chrysler dealers and customers, it's the bad bets it made on subprime mortgages during the housing bubble. The company is negotiating with the Treasury Department for another multibillion-dollar loan from the Troubled Asset Relief Program, a deal that is expected to be approved soon. The new aid will come on top of the $8.5 billion in TARP loans GMAC has already received, as well as the billions of dollars in loan guarantees and the government's 35% stake in its common stock.

One of the arguments for lending GMAC more money despite its troubles is that its financing is key to GM's and Chrysler's recovery. Despite the Fed's efforts to lower interest rates, auto loans from independent banks continue to carry significantly higher interest rates than those provided by GMAC and the lenders affiliated with other automakers. The latter also tend to welcome riskier buyers than other lenders will support. If GM and Chrysler had to rely on unaffiliated banks and credit unions to finance their businesses, they'd have even more trouble competing with the likes of Ford and Toyota.

That explanation is unsatisfying. It smacks of an open-ended obligation to do whatever it takes to keep GM and Chrysler afloat. A better rationale for another loan is that it honors a promise Washington made months ago to GMAC and other supersized banks to help all of them raise the capital needed to withstand the downturn. It's worth noting that GMAC isn't eager for the money -- the company has been trying to convince regulators that it has enough reserves. We hope GMAC gets its way. In fact, we'd rather see the government stop trying to keep GMAC from failing. It would be an important step toward letting carmakers stand on their own four wheels.

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