Stockman (6) GMAC

In his book The Great Deformation, David Stockman suggests that crony capitalism reached its zenith in the government response to the crisis in commercial paper market. The worst example was General Motors Acceptance Corporation (GMAC).

When a financial company lends long and illiquid and funds itself with short-term hot money, it needs to regularly charge its income statement with a lost reserve for the inevitable, violent moments of financial crisis when short-term money rates spike or funding dries up complete. GMAC had not done this, although it was leveraged at more than 10 to 1 and funded with massive amounts of short-term commercial paper. Although it was a purveyor of subprime auto loans, it had no ability to absorb even minor losses on its loans.

When the crisis hit, GMAC had to write down $25 billion of its loans. By every rule of capitalism, an enterprise as foolish, dangerous, predatory, and insolvent as GMAC should have been completely liquidated. Instead it remained on federal life support due to taxpayer funds and guarantees.

The economy did not benefit. There was no shortage of solvent banks, thrifts, and finance companies to serve the author and housing finance needs of creditworthy borrowers.