GMAC Is a Big Soft Spot In Global Debt Bubble

General Motors Acceptance Corporation (GMAC)?the huge $300 billion credit finance company, sitting at the valve between the overblown U.S. real estate bubble and the deflating auto sector?is facing big debt trouble in 2005-06. The trouble is driven by the falling dollar, rising interest rates, and falling auto sales. GMAC is far larger than all the other combined parts of its parent General Motors; its debt, at about $260 billion, is bigger than that of any other American corporation except the huge government-sponsored Federal National Mortgage Agency (Fannie Mae), whose mortgage debt it invests in. During 2005, GMAC will be caught simultaneously in a shrinking real estate bubble, in the tar pit of falling global auto sales, and possibly in the unpaid obligations of General Motors’ pension plan. GMAC could play a major part in a collapse of the dollar and dollar credit markets.

“GM Decline to Junk Shows Waning Confidence in Automaker,” headlined a long, March 8 Bloomberg News analysis of the fallout from February’s sharp drop in U.S. auto sales. During 2004, General Motors tried to pump up its sales with circus-level rebates for auto buyers of more than $5,000 per vehicle (the entire U.S. auto sector gave an average $2,700 rebate on every vehicle in 2004, but GM’s doubled those of the other makers). When, at the beginning of 2005, it tried to reduce the rebates somewhat, while oil, gasoline, steel, and industrial commodity prices were zooming up and total auto sales were falling, GM hit a wall; its January sales were 9% below a year earlier, and February’s were 13% down despite its having suddenly lowered prices in mid-February. Its bonds’ credit rating is now just one notch above junk, with a “negative outlook” from Fitch rating agency pointing the way to junk-bond status within weeks or months.

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