GMAC's Leasing Woes Spur Auto Finance Losses; GM On The Hook
Dow Jones

DETROIT -(Dow Jones)- Another consistent money maker for General Motors Corp. (GM) has become a liability, with GMAC Financial Services on Thursday reporting steep losses in its auto leasing business in the second quarter that will cost the auto maker at least $2 billion.

GM's former finance arm said bad leases generated $716 million in losses in the second-quarter, half of which will be absorbed by GM as part owner of the financial firm. GM will pay another $1.6 billion to support GMAC's leasing business.

The leasing-related losses, brought on largely by sinking values of pickups and sport-utility vehicles, were the main reason GMAC's auto finance business lost $717 million in the latest quarter, compared with a $395 million profit a year ago. GMAC's auto finance results were also affected by higher provisions for credit losses.

GMAC said Thursday it plans to cut its leasing business in the U.S. by 50% this year, and maybe more, to help mitigate losses. Earlier this week it announced it would eliminate subsidized leasing in Canada. Leasing comprised about 18% of GM's auto sales in the first half of 2008.

GMAC, with its ability to consistently deliver big profits, used to be a bright spot for GM, up until around the time the auto maker sold 51% of the company to Cerberus Capital Management in 2007.

Even after the nation's housing market meltdown drove GMAC's ResCap mortgage lending unit deep into the red, the auto finance business was still turning a healthy profit. In 2007, GMAC made $1.5 billion on auto loans.

Now, only insurance is a profitable business for GMAC, delivering a $135 million profit in the second quarter that doesn't come close to covering money lost on mortgages and auto lending. ResCap posted a $1.86 billion loss during the latest period.

GM shares were flat at $11.40 in recent trading, after falling more than 5% early in the session. The stock, which traded at 50-year lows earlier this month, has lost half of its value since the start of the year.

GM Earnings Come Friday

The full extent of GM's exposure to GMAC and the leasing market will become clear on Friday when the auto maker is expected to report a substantial quarterly loss.

The same economic conditions weighing on GMAC - plunging home values, shaky consumer confidence, a credit crunch and sinking U.S. auto sales - will weigh on GM's financial results. A strike at a major supplier, moves to trim U.S. truck capacity and blue-collar jobs and a new Canadian labor contract also will cost the auto maker.

The deterioration of the leasing market is the latest crisis to hit Detroit's beleaguered auto makers. Sales of trucks and SUVs - the cornerstones of U.S. auto makers' product portfolios, providing the bulk of sales and highest margins - have tanked in recent months amid record-high fuel prices and waning consumer confidence.

Big losses on leases - which have long been a popular choice for consumers and helped auto makers move more-expensive, high-margin vehicles - have forced auto finance companies to make dramatic changes to their leasing practices.

Chrysler LLC last week announced it would suspend its leasing in the U.S., while Ford Motor Co. (F), which wrote down $2.1 billion in the second quarter owing to leasing, said its financing arm would raise the cost of leases on large trucks and SUVs. A handful of banks have also scaled back or eliminated their leasing programs.

At GMAC, in addition to offering fewer leases, it will offer incentives to encourage customers to keep leased vehicles longer. GM's lease portfolio included about $30 billion in assets at the end of June, 60% of which was truck or SUV leases.

Lease contracts typically run 24 to 36 months, and consumers usually turn in their vehicles at the end of the term. That leaves the auto maker on the hook to sell vehicles that may have declined significantly in value compared to assumptions made at the time the original lease was signed.

GM, Ford and Chrysler have suffered more than their foreign rivals this year owing to their reliance on trucks and SUVs. The residual values of large vehicles have declined significantly, while values of fuel-efficient cars have gained.

A report released this week by Automotive Lease Guide showed that four of the five vehicles showing the biggest decline in residual value over the past year are made by GM. For example, according to ALG, a Chevrolet Tahoe is now expected to be worth 31.8% of its original sticker price after three years, versus 42.2% a year ago.

While the Detroit Three are taking steps to reduce their reliance on trucks and SUVs, it will take several years before cars make up a significantly larger portion of their product portfolios. Meantime, foreign auto makers are reaping the benefits of their car-centered portfolios.

-By Sharon Terlep, Dow Jones Newswires; 248-204-5532; sharon.terlep@

(Stephen Wisnefski contributed to this report.)

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  07-31-08 1241ET
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