Why GM Needs GMAC

Car Keys and Money

With word of GM looking to buy back GMACor at least GMAC's auto lending business, it bring up the question of whether the automaker wants to get back in bed with a company that was at the heart of so many of GM's financial problems a few years ago?

It's a fair question. But the concern is overstated.

What people should be focused on is whether or not the new GM can afford not to buy GMAC, which is now known as Ally Financial.

Having an effective captured finance company is critical for the health of an automaker. Can a car company succeed without one? You bet. Right now both GM and Chrysler dealers are financing deals through the GMAC successor Ally Financial. But having a captive company makes it much easier to grow the business.

Sure, at first GM, if GM owns GMAC, it would have to pay higher rates to borrow money on the open market and fund loans, but eventually that would end if a GM-owned finance operation could show it's worth the investment.

The real appeal of GM owning the old GMAC would be in making the company more attractive for an IPO.

Large investors will see GM as more valuable with a well-run captive finance operation. And if GM has an operation focusing strictly on auto lending it could do very well. Where GM got in trouble when it owned GMAC was with the mortgage finance division, known as ResCap. When it started to struggle, it weighed down GMAC, and ultimately became one of many drags on the old General Motors.

Would it be different a second time around? One would hope so. The focus at GM is building the most profitable and attractive company possible, in hopes of going public with a stock that will grow over time.

That's how Uncle Sam will get a chance to recover more of the $49 billion it sunk into GM.

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