More Cash for Real Clunkers

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With all the other issues dominating the headlines, it’s easy to forget taxpayers are still dealing with, and face major risks from, the bailout.

In fact, just this week, we got a $5 billion reminder. In a new twist on “cash for clunkers”, Treasury announced GMAC is sidling up to the taxpayer trough again. Founded in 1919 as the General Motors Acceptance Corporation, GMAC is now majority-owned by Cerberus Capital, a private-equity firm. GMAC transformed itself into a bank last December in order to tap TARP (the bailout). Sweet deal for them. Even before this latest request, they had already received $12.5 billion in taxpayer funds.


Back in the spring, GMAC was one of the 19 financial institutions subjected to Treasury “stress tests” to see if they retained enough capital to weather future financial storms. Treasury determined ten banks needed to raise an additional $74.6 billion, and GMAC in particular had to find another $11.5 billion. Well, nine of those banks were able to find private investors, but Treasury says GMAC failed to raise the full amount. GMAC is now turning to taxpayers for $5.6 billion more, bringing its total taxpayer support to more than $18 billion dollars.

GMAC’s survival is perceived as vital to returning US car manufacturers to profitability. GMAC acts as the main financing vehicle for both new purchases of GM cars and for wholesale inventory at GM dealers. And starting in April, it began doing the same for Chrysler dealers and purchasers.

But providing more taxpayer dollars under TARP’s Automotive Industry Financing Program masks the real problem of GMAC and is illustrative of the problems still dragging down the entire economy. Buoyed by the 3 billion dollar cash for clunkers program, GMAC’s car loan division did quite well the last quarter, turning a profit. Buuutttt (you knew there was a “but” coming didn’t you) their home finance division, which was one of the largest subprime mortgage lenders, continues to bleed money. And at $3.6 billion (p. 20), is the second largest participant in the Administration’s mortgage modification program. Bad mortgage debt continues to drag down the economy and keep us from wholly moving into a full-fledged economic recovery.

And speaking of bad mortgage debt, you can’t help but talk about Fannie and Freddie. While owning or guaranteeing nearly $3 trillion in home mortgages, Fannie Mae lost $18.9 billion in the third quarter, bringing its total 2009 losses to just under $57 billion. And taxpayers are pretty much footing the bill for all of these losses. Combine the cash spent shoring up Fannie Mae with taxpayer payments to its sibling Freddie Mac, and you have a whopping $110.6 billion spent to keep these “Government Sponsored Entities” afloat. And that’s just drawing on a $400 billion line of credit authorized last spring.

The problem is, we are where we are. And GMAC, Fannie and Freddie are only the tip of the bailout iceberg. Sure, Treasury has been repaid $73 billion and obtained profits of $13 billion, but in aggregate, we still have $1.1 trillion reserved for the various bailouts and more than $560 billion committed. The TARP Inspector General Neil Barofsky has said repeatedly that taxpayers are not going to get a lot of this bailout money back. So at some point we have to make the decision to pull the financial plug on some of these entities, or at the very least, unwind the taxpayer backing. As Treasury Secretary Geithner said recently, “No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure.”