Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2009, for GMAC Inc. (formerly GMAC LLC). Effective June 30, 2009, the company converted from a Delaware limited liability company to a Delaware corporation. GMAC is a global financial services firm operating in Global Automotive Finance, Mortgage, Insurance, and Corporate and Other segments. The reporting period was significantly impacted by the global economic recession, the bankruptcy and subsequent emergence of General Motors (GM) and Chrysler, and the company's conversion to a taxable corporation.
Key Financial Metrics
| Metric ($ in millions) | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Total Net Revenue | $1,026 | $3,225 |
| Net Loss | $(3,903) | $(4,578) |
| Provision for Loan Losses | $1,161 | $2,004 |
| Total Assets | $181,248 | $181,248 |
| Total Debt | $105,175 | $105,175 |
| Total Equity | $26,046 | $26,046 |
| Cash and Cash Equivalents | $18,655 | $18,655 |
| Net Cash Provided by Operating Activities | N/A | $2,281 |
Material Changes vs. Prior Period
- Net Loss Increase: Net loss increased to $3.9 billion for the quarter (from $2.5 billion in Q2 2008) and $4.6 billion for the six months (from $3.1 billion in 2008). This was driven by a $1.2 billion increase in income tax expense due to the conversion to a corporation, a $607 million goodwill impairment in Insurance operations, and continued adverse conditions in the mortgage business.
- Revenue Decline: Total net revenue decreased 22% for the quarter and 13% for the six months compared to 2008, primarily due to lower asset levels in Global Automotive Finance and Mortgage operations resulting from reduced originations and portfolio runoff.
- Provision for Loan Losses: The provision increased 51% for the quarter and 61% for the six months, driven by higher delinquencies and severity assumptions in consumer mortgage loans and specific reserves in the real-estate lending portfolio.
- Capital Structure: The company raised $7.5 billion in preferred equity from the U.S. Department of the Treasury in May 2009. Total equity increased significantly from $12.3 billion at June 30, 2008, to $26.0 billion at June 30, 2009.
Guidance, Outlook, and Risks
- Capital Requirements (S-CAP): Under the Supervisory Capital Assessment Program, GMAC must increase its common shareholder equity component of Tier 1 capital by $11.5 billion and overall Tier 1 capital by $9.1 billion by November 9, 2009. The $3.5 billion Treasury investment reduces the remaining requirement to $5.6 billion. The company is evaluating alternatives to meet this requirement.
- ResCap Liquidity: Residential Capital, LLC (ResCap), the mortgage subsidiary, faces substantial doubt regarding its ability to continue as a going concern without continued support from GMAC. GMAC has provided $1.2 billion in capital contributions to ResCap in the first half of 2009 but has no formal commitment for future support.
- GM and Chrysler Dependence: Operations are heavily dependent on GM and Chrysler. Both automakers recently emerged from bankruptcy. Adverse changes in their liquidity, sales volume, or brand value could materially impact GMAC's profitability.
- Market Risk: The company faces significant exposure to interest rate risk, foreign currency risk, and credit risk. Fair value measurements for a large portion of assets and liabilities rely on Level 3 inputs (unobservable), creating volatility in earnings.
Investor Verification Checklist
- Capital Plan Execution: Verify the specific mechanism and timeline GMAC will use to raise the remaining $5.6 billion required by the S-CAP program by November 2009.
- ResCap Support: Monitor the status of ResCap's tangible net worth covenants and any announcements regarding additional capital injections or restructuring, given the "substantial doubt" disclosure.
- GM/Chrysler Exposure: Assess the impact of the new Master Transaction Agreement with Chrysler and the post-bankruptcy performance of GM on GMAC's automotive financing volumes and credit quality.
- Loan Loss Provisions: Track the trajectory of the provision for loan losses, particularly in the mortgage portfolio, as delinquency rates and charge-offs remain elevated.
- Regulatory Capital Ratios: Confirm continued compliance with the enhanced regulatory capital ratios (15% Total risk-based capital) mandated by the Federal Reserve exemption.