GM-Chrysler Merger Prospect Clouds Chrysler Financial Future

If General Motors Corp. absorbs Chrysler LLC, a deal that could shake out as early as next week, such a move has the potential to put GM back in the captive-financing business.

Ownership of Chrysler potentially could drop the auto maker’s captive-financing arm – Chrysler Financial – into GM’s lap. This could put the Detroit auto maker back on equal footing against key competitors such as Ford Motor Co. and Toyota Motor Corp.

Although the tight credit markets have pinched auto sales in recent months, vehicle loans remain a good business, and in times of brisk sales, downright lucrative.

Last year, according to financial filings, GMAC LLC earned $1.49 billion from its auto financing business, an increase of 19.5%, or $242 million, compared with 2006. While GMAC’s earnings from auto loans have declined in the first two quarters of this year due to weak sales, it remains a principle income source to the lender as it continues to take deep losses in its mortgage business.

Before GM sold a stake in GMAC to Cerberus Capital Management LP – a move to disconnect GM from the lender’s declining credit rating – the unit’s vehicle-financing operations, that featured some commercial lending, earned $3.45 billion between 2003 and 2005.

Although reports strengthened this week of the Renault SA/Nissan Motor Co. Ltd. Alliance potentially gaining a stake in Chrysler, a GM tie-up with the struggling Auburn Hills auto maker appears to remain the favored outcome of Chrysler parent Cerberus. However, financing the deal poses a problem for cash-strapped GM, reports suggest, due to the tight lending environment.

Detroit auto makers considering more government support, John Dingell says.

To gain control of Chrysler and cash it desperately needs to squeak through the current sales drought, it is widely expected GM will swap with Cerberus its 49.0% stake in GMAC. GM sold a 51.0% controlling interest in GMAC to a consortium of investors led by Cerberus two years ago.

GMAC’s strategy today includes diversifying from auto loans. A source tells Ward’s losing GM’s business to Chrysler Financial would not cripple the lender, especially with a massive government bailout expected to wipe away bad home loans and reposition GMAC with a cleaner slate.

“They could just swap (financing arms),” says Robert Wiseman, a professor of management in the Eli Broad College of Business at Michigan State University. “But there’s a big difference between GMAC and Chrysler Financial. GMAC has brand value; it is advertised and has a mortgage unit. Chrysler Financial has limited market penetration.

“Chrysler Financial only has its assets – a building – outside of its auto loans,” he adds. “It’s not worth a lot on the open market, but Cerberus could turn it into something.”

Another likely scenario, Wiseman offers, would find Cerberus gaining full control of GMAC and making Chrysler Financial one of GMAC’s divisions. It then could license the GMAC name back to GM to originate wholesale and retail loans and use Chrysler Financial to originate loans for other auto makers.

“When Cerberus first stepped up, the theory was that GMAC and Chrysler Financial might make a good coupling,” says David Brophy, director of the Center for Venture Capital and Private Equity at the University of Michigan and a member of the board of GMAC.

GMAC already operates a similar scheme with Ditech, a flat-fee direct mortgage lender under its Residential Capital LLC mortgage unit.

Wiseman says a combination of GMAC and Chrysler Financial makes sense given the opportunity to gain economies of scale. “Whenever you successfully merge two businesses, typically they are very similar. But you wouldn’t integrate that fully, that would mean enormous costs.”

In other news to emerge surrounding the takeover, a delegation of Michigan lawmakers urges the branches of the federal government to swiftly provide an injection of capital into the Detroit Three.

Speculation rose this week that GM may seek government assistance to take over Chrysler, partly explaining reports GM wants a deal done before the election, when lawmakers might be more willing to provide support. The government’s hand could be forced anyway, since it would not want to assume Chrysler’s pension obligation in the event of its bankruptcy.

The delegation’s request includes the expedition of $25 billion in government-backed loans meant to finance facility retooling to produce the next generation of advanced technology vehicles, such as the '11 Chevrolet Volt electric vehicle due from General Motors Corp. in late-2010.

But it also calls on the Dept. of Treasury and the Federal Reserve to use their regulatory authority, including powers granted under the Emergency Economic Stabilization Act, to take any number of steps to bolster the Detroit Three’s liquidity. Such steps, the delegation says, could include a direct injection of capital to auto makers, suppliers and dealers, or action to buy up bad auto loans as a means of thawing the credit freeze in new-vehicle loans.

U.S. Rep. John Dingell (D-Detroit) says the delegation, which outlined its concerns in a letter to Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, will pursue all available options to secure additional liquidity for the industry.

“The delegation is asking the Bush administration, the Treasury, the Federal Reserve and the (Federal Deposit Insurance Corp.) also consider all available options to assist all parts of the auto industry – all the way through the dealers to the suppliers and the manufacturers themselves,” Dingell says during a conference call with journalists Thursday.

Dingell refuses to comment on whether bankruptcy fears at one of the Detroit Three motivate the delegation’s actions, but calls the current situation “very serious.”

Sen. Carl Levin (D-Detroit) asks for assistance similar to what the government will provide the mortgage industry reeling from subprime lending.

“This liquidity crisis and credit crisis is not of the auto industry’s making,” Levin says. “They need to do for the auto industry what they are doing for the mortgage industry.”

Dingell tells journalists he does not believe GM, or any other auto maker, has approached the government for financial assistance, but adds, “It is under consideration.”

GM spokeswoman Renee Rashid-Merem declines to comment on whether GM will seek aid beyond a portion of the $25 billion set aside last month for advanced propulsion work. “We’re monitoring the situation and keeping our options open,” she tells Ward’s.

Meanwhile, the Canadian Auto Workers union calls for Canadian government support to GM and Chrysler similar to the cash it will inject into the country’s banks to promote lending. The union also takes the opportunity to reiterate its opposition to GM-Chrysler combination, calling it a shell game.

“We cannot solve the industry’s problems by reshuffling company brands,” CAW President Ken Lewenza says in a statement.

As a sign of further weakening in GM’s cash position, which an absorption of Chrysler would bolster by a reported $11 billion, the auto maker encourages more white-collar employees to take early retirements. A current program seeks to trim about 5,000 salaried jobs at the auto maker by Nov. 1.

“The global economic outlook remains very concerning,” CEO Rick Wagoner and COO Fritz Henderson say in an email to executives this week. “As a result, actions are being taken throughout GM’s global operations to address our increasing need to conserve cash.”

– with Byron Pope