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EDITORIAL: Government Motors’ flawed financing

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The Federal Reserve is prepping to give General Motors' financially troubled lending partner as much as $5.6 billion in additional financial-industry bailout dollars. Since GMAC Financial Services' survival plans are largely built around floating on the government dole in the hope that its prospects improve, letting it guzzle even more taxpayer money makes little sense.

Although GMAC already is the recipient of $12.5 billion in taxpayer funding and billions of dollars in loan guarantees, the Federal Reserve confirmed Monday that out of 19 of the nation's largest banks subjected to their bailout stress test, only GMAC will receive additional bailout funds. The reason cited is its inability to raise the billions federal regulators say it needs to remain afloat after loosing $675 million in the third quarter of 2009. That creditors value the firm's prospects so little alone shows the unadvised nature of spending further deficit dollars on the strapped lender.

Much of GMAC's problems are the result of its risky venture into subprime and other home mortgages. Through its ResCap subsidiary, the company lost a fortune on home lending. In the second quarter alone, 46 percent of its $3.9 billion in losses came from the mortgage business. Expanding its government bailout does nothing to fix this problem.

In a risky gambit to raise cash, it is offering depositors at its Ally Bank subsidiary interest rates much higher than the industry norm. The move is made possible by the infusion of government money. But in a May 27 letter to the Federal Deposit Insurance Corp., the American Bankers Association warned that the plan could end up adding to GMAC's problems. Chasing everyday depositors is a typically myopic and often ineffective means to address a cash crunch. The company can take whatever risk it likes, but taxpayers shouldn't be paying for it.

Proponents argue that, although no longer owned by GM, the firm remains the primary lender to GM and Chrysler dealers and so must be helped to protect jobs and ensure the automakers' survival. Similar logic drove the federal intervention into the auto industry in the first place with, at best, questionable results.

Ford, which rejected a government handout, was the only domestic automaker to make a profit in the third quarter of the year or show any significant sign of recovering from the economic downturn. Although GM's sales increase was higher in the third quarter than its competitor, Ford increased market share in North and South American as well as Europe.

By eschewing federal regulator control and short-term funding assistance from the government, Ford executives have been forced to make tougher changes aimed at improving the company's financial future. Like its intrinsically linked financial partner, GM has not been forced to fully face the reality of the current economy and continues to operate in the red under government protection.

President Obama vowed that automakers would not "be kept afloat on an endless supply of taxpayer money." He should stick to that pledge and cut taxpayer losses instead of helping GMAC keep a single hand on the wheel as it is distracted by its hand in the government cookie jar.

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