U.S. Puts GMAC Subsidiary Into Bankruptcy. Wait. What?

The U.S. mortgage industry imploded five years ago, but the financial consequences are still cascading through our economy. Here’s one to consider: what do these businesses all have in common?

ditech, LLC DOA Holding Properties, LLC DOA Properties IX (Lots-Other), LLC EPRE LLC Equity Investment I, LLC ETS of Virginia, Inc. ETS of Washington, Inc. Executive Trustee Services LLC GMAC – RFC Holding Company, LLC GMAC Model Home Finance I, LLC GMAC Mortgage USA Corporation GMAC Mortgage, LLC GMAC Residential Holding Company, LLC GMAC RH Settlement Service, LLC GMACM Borrower LLC GMACM REO LLC GMACR Mortgage Products, LLC HFN REO SUB II, LLC Home Connects Lending Services, LLC Homecomings Financial Real Estate Holdings, LLC Homecomings Financial, LLC Ladue Associates, Inc. Passive Asset Transactions, LLC PATI A, LLC PATI B, LLC PATI Real Estate Holdings, LLC

RAHI A, LLC RAHI B, LLC RAHI Real Estate Holdings, LLC RCSFJV2004, LLCResidential Accredit Loans, Inc. Residential Asset Mortgage Products, Inc. Residential Asset Securities Corporation Residential Capital, LLC Residential Consumer Services of Alabama, LLC Residential Consumer Services of Ohio, LLC Residential Consumer Services of Texas, LLC Residential Consumer Services, LLC Residential Funding Company, LLC Residential Funding Mortgage Exchange, LLC Residential Funding Mortgage Securities I, Inc. Residential Funding Mortgage Securities II, Inc. Residential Funding Real Estate Holdings, LLC Residential Mortgage Real Estate Holdings, LLC RFC – GSAP Servicer Advance, LLC RFC Asset Holdings II, LLC RFC Asset Management, LLC RFC Borrower LLC RFC Construction Funding, LLC RFC REO LLC RFC SFJV-2002, LLC

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The answer: they are all subsidiaries of GMAC. What used to be General Motors’ financial arm got spun off some years ago, heavily invested in mortgage loan financial instruments and took a real thrashing. Since the crash in 2008, GMAC has become Ally Bank, shifted all of its bad divisions into a new subsidiary called RESCAP, and last week put RESCAP into Chapter 11 to reorganize its debts.

So that long list of businesses is owned by RESCAP. And RESCAP is owned by by Ally Bank, nee GMAC, nee General Motors Acceptance Corporation. And who owns Ally Bank? You do, you the American taxpayer. To the extent of 73.8% of issued and outstanding shares. The next biggest shareholder is Cerberus Capital Management, a private equity firm. You know, like The Mitt’s Bain Capital.

Oddly enough, Ally Bank as a whole was profitable, earning more than $1 billion in 2010. But its RESCAP subsidiary, where all of those carrion collateralized debt obligations had been dumped, was a serious drag. In fact, RESCAP contributed to Ally Bank’s failure to pass the Federal Reserve Bank’s “stress test” in March 2012. Hence, Chapter 11.

With 73.8% of the shares, the United States controls the board of directors of Ally Bank. So we have the picture of the United States voting to put part of a company it had rescued from financial ruin into bankruptcy. Which will doubtless injure the many creditors of RESCAP. None of whom are likely to be rescued from financial ruin by the U.S.

And a further consequence will be that all of the mortgages held by all of those various investors, Dietech through RFC, and likely others besides, will be frozen, with the homeowners unlikely to be able to work anything out, until the Chapter 11 is resolved. Those injured by RESCAP’s many subsidiaries won’t be able to pursue their claims. GMAC/Ally/RESCAP is headquartered in Michigan, and a high percentage of its loans are there. The Chapter 11 will add to that state’s misery. The federal government’s policy of helping homeowners saddled with bad loans will be deeply frustrated by . . . the federal government.

Even when every step along the way is logical and sensible, the outcomes can be contradictory, self-defeating and circular. GMAC Bank was too big to fail. The rest is just consequences.

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