| Back in the days banks refused to loan money if | | | | mortgage payments and turned them into bonds |
| the reason for it is to purchase a car. During | | | | through the “securitization” process |
| those times it’s not considered practical for | | | | wherein these bonds are sold off to investors. |
| someone to loan for mere luxury. Such attitude | | | | The GMAC can be considered as a perfect |
| of the banks has frustrated automakers like | | | | picture to portray an American corporation. |
| General Motors which naturally wanted for people | | | | However lately, the GMAC has been painting not |
| to purchase their vehicles. Since financing was the | | | | so good financial images. And last Thursday GM |
| main problem during those times GM has decided | | | | has succeeded in shaking up Wall Street when it |
| to solve the problem by becoming its own bank. | | | | announced that it was delaying the filing of its |
| It was in the year 1919 when GM—world’s | | | | 2006 Annual Report by a couple of weeks. |
| largest automaker and producer of quality GM | | | | According to analysts, the reason for the delay |
| grille insert --- created the General Motors | | | | was the significant exposure of GMAC to the |
| Acceptance Corp., which has become the financial | | | | ever popular subprime lending catastrophe. Just |
| arm of the automaker. The GMAC was created | | | | like the other players in the mortgage business, |
| to offer specialized credit to would-be car buyers | | | | GMAC’s home lending subsidiary, ResCap has |
| of GM by means of installment plans. | | | | been caught in a rather awful situation when it |
| GMAC has become a huge success and over the | | | | allowed risky loans to homeowners with bad |
| years has expanded its operations until it became | | | | credits. |
| the significant bottom-line contributor to GM’s | | | | In a report by the Houston Chronicle, it pictured |
| profit. Then in the year 1985, GM’s | | | | ResCap as the crown jewel in GMAC’s |
| executives decided to further expand the scope | | | | businesses holding $57 billion of subprime |
| of GMAC and this time it will not only be loaning | | | | mortgages for investment or approximately 77% |
| money to purchase cars but loan money to buy | | | | of its total loans held for investment. So where |
| homes as well. To pushed through with this plan | | | | did ResCap failed? |
| General Motors has purchased two large | | | | The exposure that ResCap had in residual interest |
| mortgage lenders and became the second largest | | | | in mortgage securities was one of the cited |
| mortgage bank in the US. | | | | caused of its problem since the loan defaults have |
| In the course of its operation GMAC has also | | | | turned out to be higher than expected and last |
| became an expert player in the aspect of | | | | Sept. 30 ResCap has recorded loss amounting to |
| structured finance or derivatives. It has taken the | | | | $1.4 billion. What will be the effect of such loss to |
| income streams generated by all those car and | | | | General Motors? |