GMAC finally got its designation as a commercial bank. That allowed the firm to get $6 billion in federal money, $5 billion of which comes from the Treasury Department in exchange for preferred notes.

The thought behind dumping all of this capital into GMAC is that it may help restart the company’s auto loan business and also build a floor under the firm’s flagging mortgage business. But, it is probably too little money, and there is no reason to believe that GMAC will lend out any of the cash to potential car buyers.

According to The Wall Street Journal, GM (GM) and Chrysler have undermined their own sales because of trouble at their lending units. "Both financing companies have been restricting credit as their own finances worsened." A look at the money that the government has put into commercial banks shows that most of the capital has been used for reserves and not lending.

GMAC may have good reason not to push more car loans. While it may help GM cut inventory, lending to consumers to buy autos is extremely risky. Many buyers already have trouble paying their mortgages and credit cards, raising the chances of default. And, used cars are as worthless as used Kleenex. The market is flooded with previously owned vehicles that no one wants. They are poor security for car loans.

The money coming to the car lending firm may also be much less than it will need longer term. In an SEC filing last month, GM said that the GMAC exposure to mortgage loans would continue to destroy its balance sheet as home default rates rise and house values fall.

The GMAC transaction looks a great deal like most other government "rescues" of financial operations. It is a start. It may help the operation for a few months, but what happens as the value of the GMAC loan portfolio continues to slide? In all probability, the federal government will have to throw more money into the pot.

Douglas A. McIntyre

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