When $60 billion just isn’t enough

Well, that didn’t take long. It’s not even been a month since the $60 billion bailout/refinancing effort was completed for Residential Capital LLC, the ailing mortgage lending arm tied to GMAC LLC, and already questions are being whispered over the company’s future. Bloomberg gives those whispers some ink:

Whether [the $60 billion is] enough to ride out the worst housing slump since the Great Depression remains in doubt. Moody’s Investors Service cut GMAC’s credit rating one level to six rankings below investment-grade last week as ResCap burns through cash after losing $5.3 billion in the past six quarters. “ResCap presents a very significant risk,” said Mark Wasden, the lead GMAC analyst at Moody’s. “There is no easy exit from their difficulties right now. We think the company will yet again find itself in need of additional cash.”

That’s the sort of assessment that we can pretty much assure readers that JPMorgan vice chairman James Lee, GM COO Fritz Henderson, and Cerberus Capital Management LP founder Stephen Feinberg had hoped to stave off for at least a few quarters, allowing ResCap to catch its battered breath. After all, the deal was touted as “one of the largest global refinancings ever completed” at the time it was announced. Isn’t that supposed to buy more than two weeks? In any other market, perhaps. But mortgage losses are mounting in the private-party market, and ResCap (along with Homecomings, GMAC, and other mortgage brands in the ResCap umbrella) was once among the rulers of the subprime roost. Which means there is plenty of bad debt still on the books. Large companies like GMAC would love to unload their distressed mortgages — and we hear that they’re certainly among the more active participants in that still-emerging marketplace — but doing so creates additional sources of risk that some might not yet appreciate. For one thing, it speeds up recognized losses; selling bad assets in bulk now, even if for a fixed loss percentage less than the severity of holding on until a property turns into REO and is eventually resold, means recognizing losses now. There’s only so much of that sort of immediate kind of hit that any one company can handle, especially a company that’s already been taken to the mat by its own credit quality. Our sources tell us that firms like GMAC are selling assets, but in a controlled manner that makes it more palatable from the perspective of overall loss experience. Which means that firms like GMAC are often stuck with a tough conundrum — the assets ResCap holds are sucking the life out of it, not so slowly, either; yet selling the assets off at once could actually mean a more certain and quicker end for the troubled lender. No wonder all those analysts are wondering aloud if $60 billion will be enough.

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