Credit & Debt: General Motors Affected By Subprime Slump

You wouldn't necessarily think that an auto manufacturer--even one as bedeviled and nearly bankrupt as GM--would be affected by failures in a totally different market, right? Well, behold the price of mass acquisition:

GM Chairman Rick Wagoner was quick to point to losses in the residential mortgage business at GMAC Financial Services from continued weakness in the subprime mortgage sector for the earnings decline. GM owns a 49 percent interest in GMAC after selling 51 percent to Cerberus Capital Management late last year. GM lost $115 million from its stake in GMAC in the quarter. GMAC posted a first-quarter loss of $305 million, primarily due to a $910 million loss from its troubled residential loan business. "Housing starts were down 30 percent in the first quarter and that had a great impact on trucks," which contribute high profits, said Erich Merkle, director of forecasting for IRN Inc., in Grand Rapids, Mich. "Those in the skilled trades don't buy a truck when they don't know where their next job is coming from."

And the paper pushers on Wall Street are concerned about GM's continued dalliances in the subprime market:

GM Chief Financial Officer Fritz Henderson said weaker GMAC results were the major reason earnings missed even the lowest of Wall Street expectations. But analysts raised concerns about both GM's remaining exposure to the riskiest segment of the U.S. mortgage market and the pace of the automaker's efforts to restore its North American operations to profitability.

This is another reason why Bernanke's statements about "containing the subprime failures" are so much bullshucks. When you have megacorporations with diverse assets in all these sectors, the losses from one will be felt in all others. If the subprime failures continue, you'll see more stories like this, and the shocks will reverberate throughout the whole economy.

Posted at May 4, 2007 12:54 PM

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You wouldn't necessarily think that an auto manufacturer--even one as bedeviled and nearly bankrupt as GM--would be affected by failures in a totally different market, right? Well, behold the price of mass acquisition: GM Chairman Rick Wagoner was quick to point to losses in the residential mortgage business at GMAC Financial Services from continued weakness in the subprime mortgage sector for the earnings decline. GM owns a 49 percent interest in GMAC after selling 51 percent to Cerberus Capital Management late last year. GM lost $115 million from its stake in GMAC in the quarter. GMAC posted a first-quarter loss of $305 million, primarily due to a $910 million loss from its troubled residential loan business. "Housing starts were down 30 percent in the first quarter and that had a great impact on trucks," which contribute high profits, said Erich Merkle, director of forecasting for IRN Inc., in Grand Rapids, Mich. "Those in the skilled trades don't buy a truck when they don't know where their next job is coming from." And the paper pushers on Wall Street are concerned about GM's continued dalliances in the subprime market: GM Chief Financial Officer Fritz Henderson said weaker GMAC results were the major reason earnings missed even the lowest of Wall Street expectations. But analysts raised concerns about both GM's remaining exposure to the riskiest segment of the U.S. mortgage market and the pace of the automaker's efforts to restore its North American operations to profitability. This is another reason why Bernanke's statements about "containing the subprime failures" are so much bullshucks. When you have megacorporations with diverse assets in all these sectors, the losses from one will be felt in all others. If the subprime failures continue, you'll see more stories like this, and the shocks will reverberate throughout the whole economy.