GMAC: Who's in Charge?

To me, the most interesting part of the Fed's decision to allow GMAC to become a bank is the fact that it will be broken up to the point at which its owners will effectively have no control over it any more. The Fed seems to have concluded that GMAC has a strong management team in place, and that its current woes are more a function of its shareholders than they are of GMAC's own internal mismanagement.

Which might seem sensible until one remembers the whole misadventure with ResCap, GMAC's subprime mortgage arm. I'm no expert on the history of GMAC, but the impression I get is that the company became a key groundbreaker in securitization technologies as a result of its core auto finance activities, and that it then felt it could make a lot of money by applying those technologies elsewhere, especially in the mortgage market.

GMAC had a stellar reputation in the world of asset-backed securities for many years, and was crucial in helping to prop up its failing parent. Historically, GMAC was a wholly-owned subsidiary of GM; when the car maker ran into financial troubles in 2006, it sold a 51% stake to Cerberus, which had not yet bought Chrysler.

The Fed has strict rules on who is and is not allowed to own a bank, and neither GM nor Cerberus meets those standards. So Cerberus is going to dividend most of its stake in GMAC back to its limited partners, while GM is going to either give or sell most of its stake in GMAC to an independent, Fed-vetted trustee with instructions to sell the equity to someone else within three years.

I don't know what kind of board GMAC is going to end up with, or who is going to sit on it. And although GMAC's managers might have more free rein than they've had until now when it comes to shareholder demands, they will also have much more stringent constraints than before when it comes to capital adequacy and other demands which will surely be made by Federal regulators.

Still, at some point, a lot of big strategic decisions are going to have to be made, both about GMAC's core business of financing GM auto purchases, and about its well-regarded but definitely non-core operations in mortgage finance around the world. Right now it's far from clear who is going to make those decisions, and who is going to sign off on them. And I do hope it will take less than three years for someone to be put unambiguously in charge.