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GM's troubles are known, and we were trying to determine why the parent's sins are infecting the child.

Obviously if GM goes bankrupt, either GMAC will be sold & the cash distributed to the GM's creditors, or GMAC will already have been sold and the cash from it will be


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Lets start with is the child (GMAC) a viable entity? Looking at the consolidated financials on EDGAR, it appears so.

So what could happen?

If GM sells GMAC, then the cash from the sale goes to GM and is done with as GM decides, unless there is a trustee, then he decides. But what happens to GMAC bond values at that point? Under a new entity, will rates go down, value goes up. Somewhat dependant on the new parent but my thought is better than BB.

If GM files bankruptcy, then GM (trustee) puts GMAC back on the block. Because you can't raid the bonds of the child to pay the debts of the parent. I see this as more of a mess and starting default on those bonds leads to suits the trustee would not want (well he is a lawyer maybe he does) So, all the bonds continue to pay until liquidated or matured.

What I see is the underlying quality of the assets. How risky is that?

How does GMAC lend out money at 0%? or 2.9%, the extra comes from the parent, so the problem I see is that if the parent goes under, then the incentives for GMAC to do these lower rates goes away and GMAC can not get the quality of loans it may have been enjoying. But, this only effects the bonds that are put out in the future. I can see those being riskier for this reason, lower quality loans. They may be forced to take more sub-prime just to stay in the game.

The assets that secure the bonds that are out there now, are the loans, the cars, that have already been loaned on. And I am not seeing the risk premium or returns of high 10%'s as being justified. Meaning that the risk should be put these maybe in the 7-8% range or so.

Ford I think is in the same boat. Ford Credit provides the financing or buy's the dealer paper. Same as Toyota, I mean Toyota's bonds are paying the high 4%'s. The security is the same - car loans. I don't see GMAC loans (or owners) any more susceptible or likely to default.

I think this is a case of Mr. Market not being efficient or rational. But hey, I am just a small investor so how would I know?

DrTarr


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