Skip to main content

Poor credit and a portfolio of bad loans aren't stopping

General Motors'

(GM) - Get General Motors Company Report

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.

var config = new Array(); config<BRACKET>"videoId"</BRACKET> = 1896876283; config<BRACKET>"playerTag"</BRACKET> = "TSCM Embedded Video Player"; config<BRACKET>"autoStart"</BRACKET> = false; config<BRACKET>"preloadBackColor"</BRACKET> = "#FFFFFF"; config<BRACKET>"useOverlayMenu"</BRACKET> = "false"; config<BRACKET>"width"</BRACKET> = 265; config<BRACKET>"height"</BRACKET> = 255; config<BRACKET>"playerId"</BRACKET> = 1243645856; createExperience(config, 8);

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 --


-- GMAC is in the commercial paper business. The Fed will then purchase commercial paper backed by GM cars as collateral.


(F) - Get Ford Motor Company Report

Scroll to Continue

TheStreet Recommends

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?

SWIFT takes on the wholesale loans made to car dealers. The National Automobile Dealers Association estimates 700 new-car dealerships will close this year, up from 430 last year. But Fitch insists that the dealer loans will not experience any problems. According to NADA, 590 new-car dealerships this year closed through September. GMAC which provides financing for most of the nation's General Motors dealers raised those lending costs recently.

Conduits are not an uncommon method for monetizing loans. Home lenders


, which was seized by federal regulators earlier this year, and

Countrywide Financial

, which was bought by

Bank of America

(BAC) - Get Bank of America Corporation Report

, created special purpose statutory trusts in Delaware to protect themselves from bankruptcy and other pitfalls.

But chicanery in financial operations and ratings agencies willing to assign high marks to sometime questionable collateral deep into the mortgage crisis is part of what got us into this mess in the first place. Moody's Investors Service, Standard & Poor's and Fitch are all subject to lawsuits alleging they assigned excessively high ratings to bonds backed by risky subprime mortgages and deceived their own shareholders.

To be sure, most people that purchase cars and arrange for financing do pay off the debt on time. But, according to an overview of trends by Experian Automotive, nearly $25 billion in loans from the second quarter of 2006 to the second quarter of 2008 are past due. The analysis found that loans 30 days past due were up 9% year-over-year in the second quarter of 2008, while loans 60 days past due were up 11%.

More disturbing is that Experian noted that finance companies specializing in car loans have increased their subprime portfolios from 15% in the second quarter of 2006 to 24.6% in the second quarter of 2008. Below subprime is the fastest-growing car loan segment, jumping to 13.4% from 9.4% over the same period.

Fitch Ratings' Corrigan insists that the collateral is secure and the loans are safe. But at the end of the day, the loan is backed by a used car. So, ultimately, if you connect the dots, that dollar bill in your wallet is a note from the Treasury that could be backed by your neighbor's used Buick.