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General Motors

(GM) - Get Report

as a bank rather than a manufacturer and you'll understand why, after Tuesday's white-hot rally, its stock will struggle to move much higher.

People tend to reel off GM's problems with an air of ennui. We've heard them all before. Sure, regulators are

blocking the

Hughes

(GMH)

sale. Yes, the company must shoulder an onerous commitment to buy a larger stake in ailing

Fiat

and overcome enormous

pension and health care liabilities. No doubt, it must grapple with the prospect of slower auto sales once it

cuts back on attractive financing offers.

Strangely missing from the usual misery list, however, are the growing signs of strain at GM's lending and insurance operation, General Motors Acceptance Corp., which accounted for more than 70% of GM's

third-quarter earnings, released Tuesday. Any damage to GMAC's balance sheet could seriously hobble GM by forcing it to cut back on auto financing, which would hurting vehicle sales, and could even cause it to issue large amounts of equity.

GM stock is down more than 40% from its 2002 high, and carries a multiple of just five times 2002 earnings, so any problems at GMAC would seem to be factored in. But a look under GMAC's hood suggests otherwise. With the economy slowing and struggling rival

Ford

(F) - Get Report

due to post its third-quarter results Wednesday, questions about the big automakers' earnings quality won't be easily pushed aside.

Mixed Bag

On Tuesday morning, GM made a promising-enough start. The Detroit company beat analysts' estimates, posting operating earnings of $696 million, or $1.24 per share, excluding Hughes' results and some big charges. Including a $1.4 billion writedown in the value of its Fiat stake and other items, GM reported a loss of $1.42 per share.

The company also raised its operating earnings forecast to $6.75 for 2002, from $6.50. On the negative side, GM management disclosed ugly but hardly unexpected estimates for its pension fund liability. It said the pension plan could be as much $23 billion underfunded by the end of the year, and it projected that efforts to close the funding gap could lop $1 billion from earnings in 2003.

At the same time, however, GM managers said they still expect to meet their

2005 earnings target of $10 per share. GM stock jumped 10% Tuesday, more than doubling the wider market's advance.

Rust Belt
GM sliding throughout 2002

The most unnerving feature about GMAC is its poor disclosure. Perusing its numbers can be like checking the oil in the dark.

In its quarterly release, little information is given about how GMAC net income rose to $476 million in the third quarter from $436 million in the prior quarter. To be sure, we can see that the biggest driver behind profits growth was GMAC's mortgage operations, which posted net income of $153 million in the latest quarter, nearly double the year-earlier number.

Darkness

What we can't see is exactly what made the bottom line expand so sharply. After all, the $153 million profit is a stunningly good result for a unit that services mortgages, because that business has been hit hard by the high level of mortgage prepayments. When asked how this business had appeared to do so well, GM execs said on a Tuesday conference call that GMAC had a very effective hedge that had done much to make up for the loss on mortgage servicing rights. GMAC has experienced a $1.5 billion decline in the value of its mortgage servicing rights this year.

When asked for more details, GM spokesman Jerry Dubrowski said: "We cannot provide details of our hedging strategy other than to say we've had good hedging performance and we've been able to offset losses."

The division of GMAC that does the auto loans reported net income that was slightly down on last year's third quarter. Dubrowski says that was because higher credit provisions offset the positive impact of having more North American loans on GMAC's books. He adds that credit provisions, or amounts added to the reserve against bad loans, were $400 million in the third quarter, compared with $280 million in the year-ago period.

Black Hole

Provisions are a cost in the income statement. That reserve jump looks conservative, but it is actually less than the second-quarter provision of $466 million. With past-due loans rising to 2.1% of total U.S. loans in the third quarter, from 1.8% in the second, there appears to be a good argument for the third-quarter provision being larger than $400 million.

However, to safely say whether that is so requires knowing the amount of bad loans that have been written off as uncollectible, which are called charge-offs. GM didn't disclose a charge-off number in its third-quarter earnings materials Tuesday and declined to give one when asked. Almost all lenders supply charge-off numbers in quarterly earnings releases.

Dubrowski says it would be wrong to jump to the conclusion that the lower provision indicates under-reserving to boost earnings. He says the provision could be lower for cyclical reasons.

GM also doesn't give credit-quality statistics for its 0% loans; in fact, it won't even say how many of them it has done. GM execs merely say that the credit quality of the 0% program is excellent because only strong borrowers are given access to it. Seeing that managers typically love to boast about good numbers, the silence on this point is intriguing.

What's more, after auto sales slowed in September and early October, GM introduced a program that offers 0% loans with the added bonus of zero down-payments and nothing to pay for 90 days. Such loans, if there are a lot of them, could end up understating credit-quality statistics for a time. That's because nothing has to be paid for three months, which could delay delinquencies by more or less the same period.

Yes, GMAC is the like motorist's biggest nightmare: The mechanical fault no one notices till it blows.