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GM: ResCap May Ram Auto Finance

The mortgage business' heavy losses could cut profit margins for auto lending, GM's CFO says.
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finance chief sees the potential for weakness at GMAC's mortgage unit to spread to auto finance in 2008.

GM CFO Fritz Henderson told Wall Street analysts at a dinner on Thursday that if GMAC's credit ratings take a hit from the heavy losses it's suffering its mortgage division, then the core auto finance business could have trouble maintaining profit margins, according to a report published Friday by Bear Stearns analyst Peter Nesvold.

"We're not there yet," said Henderson, according to Nesvold.

GM sold a 51% stake in its former finance subsidiary last year to private-equity firm Cerberus Capital Management for more than $14 billion. At the time, GM was trying to raise cash to finance a restructuring at its floundering auto business, and it was also trying to firewall GMAC's credit ratings to protect its profit margins.

Now, the sale looks like a well-timed move that helped protect GM's auto business from a collection of risky mortgage loans that were headed for a blow-up. Though it was previously GM's chief source of profitability, GMAC reported losses totaling $1.6 billion in the first three quarters of 2007, thanks largely to a bloodbath at the mortgage unit, ResCap.

While the sale helped the automaker avoid the brunt of those losses, the situation has nevertheless

weighed heavily on the financial performance of GM, which still owns 49% of the finance company.

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Meanwhile, speculation is rampant on Wall Street that ResCap could be headed for bankruptcy and default rates could begin to spike in GMAC's auto finance business as the housing debacle takes its toll on consumer spending.

Henderson's remarks fed those fears, and he also said he expects U.S. vehicle sales to be around 15.7 million vehicles in 2008, down 300,000 from GM's prior projections for the industry. Henderson said there's "more downside than upside" in his forecast, and he said a recession could lead to vehicle sales closer to 15 million.

In light of the slowdown, GM has plans to further thin the ranks of its blue-collar workers, Henderson said. The company will unveil the details of its attrition plan in the months ahead.

As for GMAC, the finance company recently reported that its mortgage unit's net worth had dropped to $6.2 billion at the end of its third quarter from $8.4 billion a year earlier. Last week, GMAC announced a $750 million bond tender offer designed to boost ResCap's fourth-quarter earnings and keep its net worth above the $5.4 billion level.

If ResCap's net worth falls below that level by the end of the year, it could violate covenants on portions of its unsecured credit lines, potentially making it a candidate for bankruptcy. GMAC also said its management team will recommend "as necessary" another capital contribution to ResCap to ensure the lender is in compliance with the covenants.

GM, which has four executives on GMAC's board, has said it is under no contractual obligation to provide the finance company with any more capital infusions beyond a $1 billion equity contribution it has made since the sale.

For its part, Cerberus is exploring a possible merger for ResCap with an overseas mortgage company. But if no alterative is forthcoming, GM could still be forced to pour more cash into GMAC to protect its credit ratings.

"We sensed GM's more likely to allow its GMAC ownership to be diluted down to levels that still maintain its minority rights before funding a ResCap bailout," said NesVold.

Shares of GM recently were up 62 cents, or 2.1%, to $29.41.