Mortgage Blues Hit GMAC (ResCap) and Cerberus
GMAC today reported that second-quarter net income fell to $293 million from $787 million a year earlier. Its mortgage unit, Residential Capital LLC, had a loss of $254 million, compared with a profit of $548 million a year earlier, because of loans to buyers with poor credit ratings.
Eric Feldstein, GMAC’s chief executive, said the company made great strides during the first half of 2007 to stem losses from the troubled residential mortgage unit. GMAC’s exposure to the subprime mortgage market caused the company to post a $305 million net loss during this year’s first quarter. “The net losses incurred by ResCap continue to constrain GMAC’s bottom-line profitability,” he said in a statement. “But we are encouraged to see that the aggressive risk-mitigation initiatives implemented in the first half of this year have reduced ResCap’s losses – quickly and significantly – despite increasing challenges in the U.S. mortgage market.”
In November 2006,GM sold 51 percent of GMAC (which includes auto-loan, mortgage and insurance units), to a group led by New York-based Cerberus Capital Management LP last year to raise money for its restructuring and help GMAC get a higher credit rating.
About Cerberus – from their press release
Established in 1992, Cerberus Capital Management, L.P. is one of the world’s leading private investment firms with $18 billion in assets under management for individual and institutional investors, including state and corporate pension funds, insurance companies, foundations and endowments. Through its team of more than 275 investment and operations professionals, Cerberus specializes in providing both financial resources and operational expertise to help transform undervalued companies into industry leaders for long-term success and value creation. Cerberus is headquartered in New York City, with offices in Chicago, Los Angeles, Atlanta, Amsterdam, Frankfurt, Tokyo, Osaka and Taipei. More information on Cerberus can be found at www.cerberuscapital.com.
ResCap lost $910 million first quarter 2007 and $254 million the second quarter. Combined losses for ResCap $1.164 billion for the first half of 2007. If profit expectations were the same for 2007, this is a negative shift of $1.748 billion during the same period. So far, sub-prime failure is reported at roughly 20% across the board. How much did GMAC ResCap hold, and how many defaulted? Was Cerberus aware of the situation and did they bail GMAC out by buying 51%, or were they led down the primrose path?
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