GMAC's home-lending unit, also known as ResCap, posted a loss of $910 million compared with a year-earlier profit of $201 million, due to continued pressures of the U.S. mortgage market. The slower housing market has led to an increase in the number of defaults on high-risk, or subprime, loans -- an area where ResCap, traditionally thought of as the jewel of the GMAC portfolio, does business.
Amid the sharp downturn in the U.S. mortgage market, GMAC said many of ResCap's nonprime assets were liquidated at a loss or marked substantially lower to reflect the severe illiquidity and depressed valuations in the prevailing market environment. GMAC established substantial incremental reserves during the quarter against various nonprime loans on the balance sheet.
In Wednesday's release, the company said its ResCap unit should "be far less vulnerable to further adverse developments in the nonprime space." GMAC also said the setback ResCap incurred "is expected to be a temporary one."
A few points.
1.) This is the last thing GM needs right now. They're already under pressure from a declining market share in the US and are attempting to turn the company around.
2.) This may be a one time event. GMAC may have seen the writing on the wall and took a great deal of corrective action all at once rather than letting it bleed out over several quarters.
3.) Notice the severity of the profit to loss swing. GMAC went from $210 profit to $910 loss -- almost a billion dollars in value. That's more than just a few mark-downs; that's a fundamental shift in the value of certain assets.
1 comment:
How could such a huge miss not crush the markets? We have seen some earnings surprises to the upside (microsoft, apple, and others) that have caused a huge rally in other equities. However, the GM miss (and it was a big one) is having no ripple effects. All indexes are up nicely, with the S & P over 1500 and the Dow poised to post another record, and continue on its torrid pace of being up all but 3 days over the last month and a half. I don't think the DOW has been down on consecutive days since early March.
With all the piss poor economic news, it seems Wall Street is pulling out good news wherever they can find it. Truly this market is turning into a :"buyer's panic"
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