What the Fed?: GM Sells U.S. a Lemon

Poor credit and a portfolio of bad loans aren't stopping General Motors' (GM Quote) finance arm from gaining access to the ample supply of federal dollars for U.S. corporations amid the credit crunch.

General Motors Acceptance Corp. has a B rating plus a negative outlook from Fitch Ratings and negative outlooks from both Moody's Investor Service and Standard & Poor's because of sliding car sales and growing turmoil in the U.S. auto industry. Yet, GMAC has applied for and been granted help from the Federal Reserve's Commercial Paper Funding Facility, which is only supposed to make loans to companies with high credit ratings willing to post good collateral.

How? Through spinning off some of its better assets into arm's length subsidiaries that, in turn, are rated highly by the same ratings agencies that hold so low an opinion of the parent company.

GMAC sells its top-rated car loans and car leases to a trust, or conduit, called CARAT and the dealer loans are sold to one named SWIFT. CARAT and SWIFT sell the loans and leases to another conduit called New Center Asset Trust (NCAT), which is given an F-1 rating by Fitch, a P-1 by Moody's and -- voila -- GMAC is in the commercial paper business. The Fed will then purchase commercial paper backed by GM cars as collateral.

Ford's (F Quote) finance arm also has been granted access to the Fed's facility.

Neither GMAC nor Fitch voice any concern that these loans may be showing signs of trouble. GMAC spokeswoman Gina Proia insists only good loans are sold to the conduits, which would mean that GMAC keeps the bad loans to itself. Proia said that only $1 billion of its commercial paper is not sold to NCAT. Yet the September 2008 report for CARAT clearly shows delinquencies are rising and the charge-off rates are climbing, according to GMAC's Web site, suggesting some loans sold to CARAT are troubled. Kevin Corrigan of Fitch says NCAT only buys AA- or higher-rated loans, but if some of the loans are delinquent, how can they receive a AAA rating?