Credit Worries Swirl Around GMAC

Cerberus Capital Management may be celebrating its historic acquisition of Chrysler after turmoil in the credit markets delayed the deal, but no champagne is flowing for the private-equity firm's other landmark purchase in Detroit.

GMAC, the finance arm of General Motors (GM Quote) that is 51%-owned by Cerberus, is facing worries in the derivatives markets about bankruptcy at its mortgage-lending unit. The price of credit protection for GMAC's mortgage business, Residential Capital, or ResCap, soared by more than $100,000 a year on Friday, as measured by the credit default swaps market.

"ResCap is trading like it could fail sometime this year," says Justin Monteith, an analyst with KDP Investment Advisors, though he adds that he doesn't expect that to happen.

The credit default swaps market is an immature market, prone to irrational swings as a sudden spike in uncertainty can breed fear among traders. Such fears have spread like wildfire as evidence mounts that credit defaults in the so-called subprime lending market are spilling over into consumers with stronger credit histories, calling into question the reliability of credit ratings on which investors have relied.

Last week, GMAC inspired some confidence with its second-quarter results, despite a 63% year-over-year drop in net income. Excluding a loss of $254 million from ResCap, GMAC's earnings were only down 30%. And though ResCap was in the red, its results marked a vast improvement from the $910 million loss it posted in the first quarter.