GM Making a U-Turn on Auto Loan Business?

GM, which sold its auto-financing arm three years ago, is now considering reentering the auto-loan business, according to Bloomberg.
GM, which sold its auto-financing arm three years ago, is now considering reentering the auto-loan business, according to Bloomberg.

Three years after selling its controlling interest in financial services company GMAC, General Motors is looking at reentering the auto-loan business. Executives at the Detroit-based carmaker believe having an in-house financing operation would allow GM to offer more competitive loans and leases and help drive profits, according to news reports.

GM might buy back its GMAC business, start a new finance unit or form a partnership with banks and other financial institutions, reports Bloomberg News, citing anonymous sources. CEO Ed Whitacre wants the company to have its own finance operation up and running in time for GM's initial public offering, which has been anticipated since the company exited bankruptcy last July and which could happen as soon as October.

Credit Would Be a Boon

Having a captive credit unit -- as GM once had with GMAC -- would be a boon for GM dealers, allowing them to offer better terms on leases and loans, and would make an initial public offering more attractive to investors, says analyst Rebecca Lindland of IHS Global Insight.

"The IPO is going to be more of a success if they can sell more vehicles than they have been selling," Lindland tells Bloomberg. "They should be able to do that if they can be more aggressive in their financing. Having their own finance company would certainly help."

Other automakers, including Ford Motor (F), Toyota Motor (TM) and Honda Motor (HMC), control their own financing units.

In 2006, seeking to raise cash, a struggling GM sold its 51% stake in GMAC for $7.4 billion. A group of new owners, led by Cerberus Capital Management (the same firm that bought Chrysler from Daimler (DAI) in 2007), bought GM's share. Two years later, however, bad loans led to GMAC being bailed out by the federal government, which now owns 56% of the company.

Still Relies on GMAC as Ally

GM spokesman Tom Wilkinson said Tuesday that the company wouldn't comment on the speculation about financial activities. The Treasury Department, which supplied GMAC with a $17.2 billion cash injection under the Troubled Asset Relief Program, also declined to comment.

For the past three years, GM has had to rely on outside lenders, including GMAC, which changed its name to Ally Financial earlier this month. Ally financed 34% of GM sales in the first quarter, up from 30% in the previous three months. But Chrysler Group also depends on Ally, which provided loans for 42% of Chrysler purchases last quarter, up from 26% in the three months ending December.

Ally spokeswoman Gina Proia tells the Associated Press the company's current structure as a bank-holding company provides advantages over being an automaker's finance arm. If the auto giant were to pursue a purchase of Ally, the deal would require changes in banking laws because GM is currently barred from owning a bank.

GM Turning a Profit?

GM plans to report earnings next week and executives have hinted that the company may have turned profitable in the first quarter. Last month, GM posted a $4.3 billion loss from the time it exited bankruptcy last July until the end of 2009.

Last month, GM announced it had paid back $6.7 billion in loans five years ahead of schedule, although there has been controversy over the accuracy of that claim. The federal government holds a 61% stake in GM, which expects to get the bulk of its $50 million investment back after GM shares are offered to the public.

For its part, Ally Financial reported last week that it earned $162 million in the first three months ending March, which represents its first profitable quarter since 2008.