GMAC ResCap Financial Struggles and Government Intervention

GMAC ResCap's financial struggles began to unfold in 2006, when it started to lose money on subprime mortgages.

The company's woes were exacerbated by the housing market crash in 2007, which led to a sharp decline in the value of its mortgage-backed securities.

GMAC ResCap's financial struggles led to a $6 billion bailout from the US government in 2008, which was part of the Troubled Asset Relief Program (TARP).

The bailout came with conditions, including the requirement that GMAC ResCap raise private capital to match the government's investment.

Related reading: Gmac Bank Trust

GMAC ResCap was created to fund the purchase of General Motors vehicles and later expanded into mortgage lending.

GMAC ResCap was formed in 1982, but the company has its roots dating back to 1919 when GMAC was established.

The company has undergone significant changes over the years, with GMAC Mortgage being created in 1985 and later acquiring Residential Funding Corporation in 1990.

Here's a breakdown of GMAC ResCap's parent and subsidiary companies:

GMAC ResCap's CEO as of May 2009 was Alvaro G. de Molina, who was still in that position at that time.

GMAC ResCap is facing a potential downgrade from Moody's Investors Service Inc. due to its close ties to its parent company, General Motors Acceptance Corp.

Moody's rates ResCap's senior unsecured debt Baa2, two notches above junk, but all three major agencies would rate ResCap higher if it had no ties to GMAC.

GMAC's debt has the same rating as ResCap's, and its parent company, General Motors Corp., is rated one notch lower.

This potential downgrade could impact ResCap's access to capital, which is already a concern, with the company struggling to raise funds.

GMAC is still on track to earn at least $2.5 billion this year and pay a dividend of more than $2 billion to GM, despite problems with access to capital.

Broaden your view: Ally Gmac

GMAC LLC completed a more than $60 billion refinancing and funding package to improve the liquidity of its struggling subsidiary, mortgage lender Residential Capital LLC.

The package included a credit facility with GMAC, asset sales to GMAC and Cerberus, and an exchange offer for ResCap's debt.

ResCap posted large losses in the first quarter, losing $859 million, putting it in danger of failing to meet financial obligations.

More than 50 institutions worldwide are participating in the plan, providing a lifeline to the ailing lender.

GMAC provided a $3.5 billion credit line to ResCap, with GM and Cerberus taking the first loss if ResCap defaults.

About $2.6 billion in notes due in 2008 and 2009 were tendered in the exchange offer, to be exchanged for new notes due in 2010.

ResCap says about $6 billion in notes due between 2010 and 2015 were tendered and will be exchanged for new debt due in 2015.

$1.6 billion of the notes due in 2008 and 2009 and $2.6 billion of the notes due between 2010 and 2015 were exchanged at below face value.

Consider reading: New Century Financial

Moody's Investors Service Inc. has put its ratings for ResCap, GMAC, and General Motors Corp. under review, which could lead to a downgrade of approximately $4.8 billion of ResCap debt.

The agency is concerned about ResCap's close ties to its parent company, GMAC, which has a substantial amount of unsecured debt.

ResCap's senior unsecured debt is currently rated Baa2, two notches above junk, but all three major credit agencies have said their ratings would be higher if ResCap had no ties to GMAC.

ResCap's intrinsic credit strengths, including its sound earnings base and liquidity, are being considered by Moody's in its review.

GMAC's chief financial officer, Sanjiv Khattri, is confident that the "ring-fence" between ResCap and GMAC will continue to weaken as ResCap gains access to capital.

Suggestion: Interest Rate for Mortgage Bad Credit