It is hardly surprising that GMAC is circling back to the government for a third helping of taxpayer money. GMAC is struggling under the double whammy of bad car loans and the fallout from its misguided foray into mortgage finance at the height of the housing bubble. After the government applied stress tests to the banks last May, it was the only big bank that could not raise the capital it was deemed to need.
Still, GMAC’s return to the public trough — where it expects to get up to $5.6 billion on top of the $12.5 billion it has received since December — should serve as a reminder that much of the American banking system is nowhere near where it needs to be despite hundreds of billions of dollars doled out by the Treasury.
If the federal government’s strategy to save the banks was meant to get them back into the business of lending to American consumers and businesses, it has not worked yet.
GMAC’s sorry state is bad enough news for Main Street. It is the main source of financing for General Motors and Chrysler dealers around the country. That means it is virtually assured to get the additional money it needs for the same reason that the government bailed out the automakers and then gave them the windfall profits of the cash-for-clunkers initiative: too many auto-sector jobs are on the line.
But GMAC is hardly the only hobbled financial institution in the country. Bank of America reported a $1 billion loss in the last quarter and is still limping along, dragged down by its bloated portfolio of bad loans. Citigroup relied on accounting gymnastics and a dubious decision to stockpile few reserves against potential loan losses in order to make a $100 million profit.
The mere fact that these banks are still going concerns is because of the government’s willingness to ply them with cash. But neither is lending much.
The banks that do have the financial wherewithal — like Goldman Sachs and JPMorgan Chase, which made combined profits of nearly $7 billion in the third quarter — are not making their money through lending. They are making it from trading complex financial products that few people understand.
Meanwhile, sectors of the economy are being starved of credit. Consumer credit by commercial banks stood at $834 billion in August — about $45 billion less than at the end of last year. Business financing is doing no better. Banks’ outstanding commercial and industrial loans fell to $1.411 trillion in September, $170 billion less than a year earlier. Commercial paper issued by nonfinancial businesses has plummeted 40 percent over the last year.
This will not do. It is nigh impossible for economic recovery to take hold when credit is sputtering as it is. For the Obama administration’s financial strategy to be a success, the banks must do more than survive. They must lend again.
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