ResCap's CEO Resignagion Likely Means Trouble Ahead

Selling off a contolling interest in GMAC had one primary objective: Lower the cost of borrowing for GM's huge financing arm.

When GM's debt was downgraded to junk it meant that the interest GMAC had to pay on financing for the hundreds of billions of dollars worth of real estate and car loans it was making. Within GMAC, ResCap was given an extra special protected status with capital guarantees that allowed it to receive AAA credit ratings.

After a very short tenure, the CFO of ResCap is stepping down. As usual, the company is saying that it is for personal reasons, but in the coporate world the resignation of a CFO is almost a sign of rats leaving a sinking ship. ResCap includes Ditech, which was one of the most aggressive lenders around during the housing boom. Undoubtedly the loans that ResCap is now responsible for are going bad at an alarming rate. Please view this blog to see things are going in the mortgage portfolio of another aggressive lender.

As ResCap's losses mount, GMAC has to make up for missing capital to keep the credit rating alive. This in turn hurts the profitability of GM. The real estate housing collapse still has a very long way to go, and GM will continue to feel its share of the pain via GMAC and ResCap.