ResCap Worries Dent GM

GMAC recently reported that its second-quarter net income dropped 63%. Excluding a loss of $254 million from ResCap, GMAC's earnings were only down 30%. While ResCap was in the red, its results marked a vast improvement from the $910 million loss it posted in the first quarter, which reduced GM's earnings in that quarter by $115 million.

While the report signaled progress, GMAC said last week in a filing with the Securities and Exchange Commission that there were material weaknesses as of June 30 in its internal financial controls. The company warned that if it's unable to rectify the problems, the weaknesses could result in material misstatements in financial results for future periods.

Sure enough, the problems were found in its mortgage business. GMAC said it found deficiencies in its "change management" process and the handling of account reconciliations at ResCap, and it made operational changes to processes involving the repurchase of some loans not serviced by ResCap.

The disclosure put a cloud of uncertainty over GMAC in the midst of a global credit crunch that has sparked an extended selloff in stock markets around the world. While its insurance and automotive lending businesses have posted profits to offset losses at ResCap, observers have speculated that housing weakness will spread to other categories of its lending business.